Chapter 15 of the Bankruptcy Code permits a foreign representative of a foreign insolvency proceeding to seek a bankruptcy court’s assistance in an ancillary proceeding upon recognition of the foreign proceeding. Upon recognition, Chapter 15 empowers a bankruptcy court to grant broad relief to a foreign representative to protect the assets of the debtor or the interests of its creditors in the United States. That said, Congress nonetheless denied a foreign representative the ability to use the Bankruptcy Code’s avoidance powers in a Chapter 15 case, absent a plenary case under Chapter 7 or 11 involving the same debtor. But did Congress also exclude avoidance actions under foreign law from the scope of available Chapter 15 relief? In a potentially far-reaching decision of first impression, the Fifth Circuit held in In re Condor Insurance Ltd.1 that Chapter 15 does not bar a foreign representative’s resort to avoidance powers supplied by applicable foreign law and that a foreign representative has standing under Chapter 15 to initiate such a suit in the United States.

Here’s the background. Condor Insurance Limited (“CIL”), a Nevis corporation, formerly operated an insurance and surety bond business. One of its creditors began a winding-up proceeding under Nevis law in late 2006. In May 2007, the Nevis court granted the petition and appointed two Joint Official Liquidators. As CIL’s foreign representative, the Joint Official Liquidators filed a Chapter 15 petition in Mississippi seeking recognition of the Nevis winding-up petition as a foreign main proceeding. The Bankruptcy Court granted such relief in August 2007. The Joint Official Liquidators then filed an adversary proceeding here, alleging the fraudulent transfer of over $313 million of CIL’s assets to or by a CIL affiliate, Condor Guaranty, Inc. (“Condor Guaranty”), and other defendants.

Condor Guaranty moved to dismiss the adversary proceeding, contending that a foreign representative could only bring an avoidance action in a Chapter 7 or Chapter 11 case, not in the Chapter 15 case.2 The Bankruptcy Court agreed, finding that a foreign representative must file a separate, independent bankruptcy case under another chapter of the Bankruptcy Code; Chapter 15 alone was not enough. Specifically, section 1521(a)(7) of the Bankruptcy Code provides that a bankruptcy court has, upon recognition of a foreign proceeding, the discretion to grant a broad range of relief to a foreign representative in a Chapter 15 case, “except for relief available under sections 522, 544, 545, 547, 548, 550 and 724(a).”3 Those sections of the Bankruptcy Code incorporate avoidance actions under U.S. law. In addition, section 1523(a) of the Bankruptcy Code provides that upon recognition of a foreign proceeding, “the foreign representative has standing in a case concerning the debtor pending under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553 and 724(a).”4 The Bankruptcy Court concluded that the two sections, when read together, prohibit a foreign representative from pursuing any avoidance action under Chapter 15, but instead require that the foreign representative must assert such actions in a Chapter 7 or Chapter 11 case. In the first round of appeals, the District Court affirmed.

On appeal to the Fifth Circuit, the Court of Appeals reversed the courts below, holding that Chapter 15 does not exclude avoidance actions under foreign law. It focused extensively on the legislative history and international origins of Chapter 15. Chapter 15 mostly adopts the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency. Turning first to rules of statutory construction, the Fifth Circuit concluded that the Bankruptcy Code was silent regarding a foreign representative’s ability to initiate adversary proceedings in Chapter 15 that apply foreign – versus United States – law.5 Judge Patrick E. Higginbotham, writing for an unanimous court, noted that while section 1521(a)(7) expressly carves out avoidance actions under United States law as a form of relief that a bankruptcy court can grant to a foreign representative, the exception does not necessarily mandate a conclusion that Congress also intended to deny the foreign representative avoidance powers supplied by applicable foreign law. “If Congress wished to bar all avoidance actions whatever their source, it could have stated so; it did not,” explained the Court.

The Fifth Circuit found further support for its conclusion in caselaw under former section 304 of the Bankruptcy Code. Former section 304, though more limited in scope than Chapter 15, provided significant discretionary relief to U.S. proceedings ancillary to foreign insolvency cases: a bankruptcy court could enjoin actions or judgments against the debtor or debtor’s property, order the turnover of the property to a foreign representative, or “order other appropriate relief.”6 Turning to former section 304 precedent, the Fifth Circuit noted that cases under section 304 recognized a foreign representative’s authority to bring avoidance actions under both U.S. and foreign law through an ancillary proceeding. And while some cases under former section 304 limited a foreign representative’s ability to bring a Bankruptcy Code avoidance action, the Fifth Circuit concluded that section 304 otherwise permitted avoidance actions under foreign law when foreign law applied and would provide for such relief. Because Congress expressly intended that case law under former section 304 should continue to apply under Chapter 15,7 the Fifth Circuit concluded that section 1521(a)(7) permits a foreign representative to bring suit in the U.S. under foreign avoidance law without having to resort to Chapter 7 or Chapter 11 relief.

The Fifth Circuit has thus opened bankruptcy court access to foreign representatives for purposes of pursuing avoidance actions under foreign law. The decision marks a significant step towards achieving the cooperative relationship between United States courts and those of other countries presiding over cross-border insolvency proceedings that animates Chapter 15’s framework. It creates an additional and powerful tool for administrators of foreign proceedings to protect a foreign debtor’s assets, and regulate its conduct, in the United States.