September 2019 Quarterly Newsletter

Asset recovery column: Globalisation catches up with the US insolvency courts

Shareholder Leyza Florin Blanco and attorney Christopher Noel from Sequor Law in Miami discuss recent developments in coordination and communication between courts handling cross-border insolvencies.

In today’s ever-globalized world, courts are progressively recognizing the need for cross-border coordination and cooperation when dealing with insolvency matters. Earlier this summer, the US Bankruptcy Court for the District of Delaware adopted the Judicial Insolvency Network’s (JIN) Modalities of Court-to-Court Communication (the Modalities). The Delaware court’s adoption of the Modalities followed its February 2017 promulgation of Part X: Guidelines for Communication and Cooperation Between Courts in Cross-Border Insolvency Matters (the Guidelines).

The Guidelines and Modalities represent an unprecedented attempt at creating a unified framework for coordination and cooperation, and in some cases, joint hearings. In the past, coordination and cooperation among US bankruptcy judges and courts abroad was based on section 1525 of the US Bankruptcy Code (Cooperation and direct communication between the court and foreign courts or foreign representatives), and it was accomplished on an ad hoc basis, which was ultimately left up to the specific judges handling the cross-border insolvency matter. This article examines the lead-up to the District of Delaware’s adoption of the Modalities, the Modalities’ goals in facilitating cross-border communication in insolvency matters, and forecasts the implications of the Modalities upon – and assuming – their addition to the District of Delaware Local Rules of Civil Practice and Procedure.

The beginnings of global cooperation

The District of Delaware and the Supreme Court of Singapore announced the formal implementation of the Guidelines on 1 February 2017. The Guidelines are the result of work by judges around the world – judges in Australia, Bermuda, the British Virgin Islands, Canada, the Cayman Islands, England and Wales, Singapore, and the United States all contributed to their development beginning at the 2016 JIN meeting in Singapore. To date, they have been adopted by some of the busiest bankruptcy and insolvency tribunals around the world (see list at foot of article).

The goal of adopting the Guidelines was “to improve in the interests of all stakeholders the efficiency and effectiveness of cross-border proceedings relating to insolvency or adjustment of debt opened in more than one jurisdiction by enhancing coordination and cooperation amongst courts”. Ultimately, the Guidelines are meant to benefit all stakeholders in cross-border insolvencies, by improving efficiency in the insolvency process and reducing litigation costs. The Guidelines comprise an introduction setting forth objectives, 14 enumerated guidelines providing guidance on protocols, and an appendix addressing joint hearings.

Delaware moves the ball

On 25 July 2019, the JIN announced its adoption of the Modalities. On the same day, Judge Christopher Sontchi, chief judge of the US Bankruptcy Court for the District of Delaware, entered an order adopting the Modalities on an interim basis, pending the District Court’s annual review of its Local Rules.  This means the District of Delaware will now follow the Modalities when dealing with cross-border insolvency matters, even before they are formally adopted into the Local Rules. The Modalities include guidance concerning the designation of a so-called facilitator, the initiation of communications between judges, arrangements for those communications, and the actual communications between judges. Each of these areas of guidance will be discussed below.

Laying the groundwork

The Modalities apply to all direct communications between courts in cross-border insolvency proceedings. They also govern the mechanics of communication between courts in parallel proceedings, such as a Chapter 15 proceeding in the US where there is a simultaneous foreign main proceeding abroad. In general, the Modalities anticipate that a judge in a matter with cross-border elements (the initiating judge) will attempt to communicate with other judges and courts considering the same insolvency matter (the receiving judge).

To accomplish this objective, courts are now requested to publish information regarding facilitators so that there is a clear line of communication. Among the information in the facilitator, publication will be the facilitator’s identity (the District of Delaware has identified its clerk of court to act in this role) and the language for the initial communication, as well as what technology is available to facilitate communication. This basic information was not necessarily easily obtained in the past, and a clear designation of with whom to communicate and how those communications should be made, will alone facilitate greater coordination and cooperation among those involved in cross-border insolvencies.

Saying hello

Once the groundwork for communication is established, and there is a clear line of communication with a court’s facilitator, the judges involved in parallel cross-border insolvency proceedings should exchange relevant information to keep the line of communication open. The initiating judge should provide basic information to the receiving judge, such as the facilitator’s contact information, the initiating judge’s contact information, information concerning the matter before the initiating judge, the nature of the matter, whether the parties before the initiating judge have consented to the communication, and the specific issues upon which communication is sought. Once this initial communication is accomplished, then the facilitator should step in and assist with coordinating between the initiating and the receiving judges.

Setting a date

After a line of communication is open, the initiating and receiving judges’ facilitators are free to communicate and arrange for the two judges to speak, with or without the presence of counsel or the parties. The initiating and receiving judges have great leeway in how communication is made, and the Modalities provide only that the two judges should be satisfied with the arrangements, including appropriate translation services and protocols to communicate confidential information via a secure method.

The first meeting and ongoing discussions.

After the necessary protocols are in place, the Modalities suggest that the initiating and receiving judges communicate in accordance with the Guidelines. Additionally, the Modalities provide that, should the two judges so wish, they may discontinue the use of their respective facilitators to allow for an efficient line of direct communication. This may also be done without the presence of counsel or the parties. Ultimately, the Modalities’ goal is to allow easy, efficient, and productive communication between the initiating and receiving judges so as to improve efficiency.

A globalized world

Now that the District of Delaware has, at least initially, adopted the Modalities, it is foreseeable that other US Bankruptcy courts will follow suit. The number of cross-border insolvency proceedings that could (and will) benefit from increased coordination and cooperation across borders is ever growing. All parties – creditors, debtors, bankruptcy estates, and insolvency tribunals – stand to benefit from the Modalities when handling cross-border insolvencies.

Moving forward, the potential impact on cross-border insolvency practice is great. Both insolvency courts and practitioners alike will need to work together to implement the Modalities and Guidelines so that all involved are familiar and comfortable working with this new framework. Additionally, through ongoing efforts, cross-border insolvency matters should become more streamlined and efficient. The free flow of information will take much of the uncertainty out of cross-border situations where multiple parallel proceedings are involved. In sum, the Modalities and Guidelines now facilitate the insolvency practice’s ongoing evolution in an ever-more-globalised world.

Courts Adopting the Guidelines for Communication and Cooperation Between Courts in Cross-Border Insolvency Matters

  • The US Bankruptcy Court for the District of Delaware
  • The Supreme Court of Singapore
  • The US Bankruptcy Court for the Southern District of New York
  • The Supreme Court of Bermuda
  • The Chancery Division of England & Wales
  • The Eastern Caribbean Supreme Court
  • The Supreme Court of New South Wales
  • The US Bankruptcy Court for the Southern District of Florida
  • The Seoul Bankruptcy Court
  • The Grand Court of the Cayman Islands
  • The Commercial List Users’ Committee of the Superior Court of Justice – Ontario (Commercial List)
  • The District Court Midden-Nederland, in the Netherlands

To view the original article, click here.

Lawyers Advisory Committee

Leyza BlancoBy: Guest Contributor Leyza Florin Blanco, Chair Lawyers Advisory Committee

The Lawyers Advisory Committee (LAC) for the Southern District of Florida Bankruptcy Court was formed in 2018 to provide a forum for communication, feedback, and resources between the judges and the bar. Its purpose includes regularly soliciting the bar for commentary regarding bankruptcy practice and receiving requests from the court to consider issues arising from the practice of law before the Court.

The LAC may recommend changes in the practice and procedures throughout the district and also acts as a liaison between the Court and the practitioners. In addition, the LAC is charged with the development, implementation, and maintenance of bankruptcy-related programs in the district as requested by the Court. To view samples of issues addressed by the LAC, please visit the LAC web page to view meeting minutes.

The LAC is only as successful as the bankruptcy bar makes it. We are dependent on you to contact LAC members with any concerns or suggestions that you might have about bankruptcy practice in our district. The success of our bankruptcy practice in the Southern District of Florida is our absolute priority. If you have any recommendations which will improve the Court’s administration of justice, please reach out to a member of the LAC or contact us at LAC@flsb.uscourts.gov. We encourage you to participate by submitting feedback for consideration and assist the LAC in making our bankruptcy practice in the Southern District of Florida the best it can be.

BANKRUPTCY RULES AND FORMS ARE AMENDED EFFECTIVE 12/1/19

Amendments to the federal rules and forms scheduled to take effect 12/1/19 and can be reviewed at the U.S. Courts website at these links:

Pending Rules and Forms Amendments
Pending Changes in Bankruptcy Forms

If any of the above amendments necessitate changes in this court’s local rules, local forms, court guidelines, clerk’s instructions or any other local documents, notice will be provided prior to the December 1, 2019, effective date of the bankruptcy rules and forms amendments.

COURT GUIDELINES FOR ATTORNEYS FOR CHAPTER 13 DEBTORS AMENDED

Please take notice that the “Guidelines for Compensation for Professional Services or Reimbursement of Expenses by Attorneys for Chapter 13 Debtors Pursuant to Local Rule 2016-1(B)(2)(a)” have been amended to reflect an increase in the compensation fee that an attorney may charge without application to the court.

The “no-look” fee will increase from $3,500 to $4,500 for all cases filed under or converted to chapter 13 on or after September 1, 2019. A Public Notice and amended “Guidelines” are currently posted on the court website.

PROPOSED AMENDMENT TO THE FEDERAL RULES PUBLIC COMMENT PERIOD CLOSES FEBRUARY 19, 2020

On August 19, 2019, the Judicial Conference Advisory Committees on Appellate, Bankruptcy, and Civil Rules published proposed amendments to their respective rules and forms and requested that the proposals be circulated to the bar and public for comment.

Appellate Rules: 3, 6, 42, and Forms 1 and 2;    Bankruptcy Rules: 2005, 3007, 7007.1, and 9036;    Civil Rule: 7.1

The proposed amendments, rules committee reports explaining the proposed changes, and instructions on how to submit comments are posted on the U.S. Courts website  at:

Proposed Amendments Published Comments

The public comment period closes on February 19, 2020. If approved, the amendments would become effective December 1, 2021.

 

Click here to read the full article.

Thought Leaders Global Elite – Asset Recovery (GIR 2019)

Who’s Who Legal says: Edward Davis Jr is one of the foremost lawyers in our research this year. Sources note, “He is particularly strong at identifying key issues and strategizing in ways that take those key issues into consideration.”

Click here to read the full article.

Asset Recovery Magazine – Florida Leads the Way in Development of Chapter 15 Jurisprudence

By Leyza Florin Blanco, Andrew B. Dawson and Greg S. Grossman

Chapter 15 of the Bankruptcy Code has become a powerful asset recovery tool, and the Florida bankruptcy courts have been leading the way in this development. The Southern District of Florida has seen more Chapter 15 lings than any court other than the Southern District of New York, and many of these Florida Chapter 15 cases have been focused on assisting foreign trustees and liquidators track down and recover assets in the United States. Our team at Sequor Law in Miami has alone led over forty chapter 15 cases.

While Chapter 15 is not a new tool—it is approaching its fourteenth birthday—it is, like many a teenager, under-appreciated and at times misunderstood. This is in part because Chapter 15 is not really “bankruptcy” in the sense that it does not create a bankruptcy estate or appoint a trustee. Instead, Chapter 15 provides a procedure to assist trustees administer foreign insolvency cases whose cross- border estates reach into the United States. The underappreciation also stems in part because Chapter 15’s substantive contours remain unknown, as it is primarily a procedural vehicle with minimal substantive constraints.

Finally, because Chapter 15 requires U.S. bankruptcy courts to interface with foreign insolvency proceedings, there has been a great deal of uncertainty as to how open courts would be to cooperating with foreign insolvency proceedings, particularly when those foreign proceedings involve insolvency laws that are importantly different from U.S. bankruptcy law in substance and process. One common concern when Chapter 15 was rst enacted in 2008 was that U.S. bankruptcy courts might be reluctant to cooperate with foreign proceedings—or that they would cooperate inconsistently—in the face of foreign insolvency laws.

Florida bankruptcy courts have in recent years played a key role in the development of Chapter 15. It is perhaps no surprise that courts here have been leaders in this arena, particularly as to cross-border insolvencies originating from Latin and South America. These courts have played important roles in establishing precedent for inter- American cooperation and assistance in this still-developing area of law. This article will discuss three recent decisions that highlight developments that may be of particular interest in asset recovery efforts.

Chapter 15: A Bankruptcy without a Bankruptcy Estate
Chapter 15 of the U.S. Bankruptcy Code provides a powerful tool kit for bankruptcy trustees and liquidators, but it is not itself a “bankruptcy” case. It does not open a full bankruptcy proceeding or create an estate, as would happen in a typical corporate bankruptcy case. Instead, Chapter 15 creates a process to assist the representative of a foreign proceeding, whether that be a debtor- in-possession, trustee, monitor, or other official. Chapter 15 permits that foreign representative to open a case in the bankruptcy court in order to seek assistance within the United States, with that assistance ranging from discovery orders to asset turnover orders. The bankruptcy court’s threshold function is to determine whether to recognize foreign proceeding, either a foreign main proceeding (i.e., one led where the debtor has its “center of main interests”) or foreign nonmain proceeding (i.e., one led where the debtor has an establishment). The court then has discretion to fashion assistance.

Thus, there is no actual “debtor” in the Chapter 15 case and no estate is created. Whereas a traditional bankruptcy case can be a cost-intensive and disruptive endeavor—trustees are appointed, claims must be processed, assets liquidated and distributed, etc. —Chapter 15, in contrast, is not a traditional bankruptcy case. Rather, it is an ancillary case in aid of the foreign bankruptcy proceeding. It is thus more exible and less onerous than a traditional bankruptcy case.

The main questions in these ancillary cases concern what aid is available to the trustees of the foreign insolvency cases. Chapter 15 provides some very speci c procedures designed to facilitate that cross-border assistance, e.g., authorizing judge-to-judge communications, and it provides a non-exclusive list of relief the U.S. bankruptcy court can grant to the foreign representative. As with any relatively new legislation, there is a lot of uncertainty as to the extent of that relief and to the standards for granting that relief. The uncertainty in Chapter 15 has an additional complicating factor due to its cross-border nature: would U.S. bankruptcy courts extend relief to foreign bankruptcy proceedings that differ from U.S. bankruptcy law and procedures?

Three Florida cases brought by Sequor Law on behalf of foreign representatives, illustrate these issues and show how the Florida bankruptcy courts have helped fashion answers and standards.

Who is the Foreign “Debtor”: In re Petroforte
The first case is by now well known in the cross-border insolvency world so will receive only a cursory treatment; however, it would be remiss to exclude the case altogether as it has had important rami cations throughout the Chapter 15 jurisprudence.

Petroforte was one of Brazil’s largest gas and ethanol distributors before entering bankruptcy. That liquidation had uncovered evidence of fraudulent transfers made to several entities, which provided the basis for the Brazilian court to enter ex parte an order extending the bankruptcy case to include the transferees. The Brazilian trustees commenced a Chapter 15 proceeding in the Southern District of Florida to seek discovery to assist the Brazilian liquidation. Some of these discovery targets objected on two main grounds: first, the argued that the Chapter 15 court should refuse to recognize the Brazilian extension order on public policy grounds; second, they argued that the foreign representative could not use Chapter 15 to order discovery against the transferees because they were not “debtors”.

In what is now a widely-cited case (In re Petroforte Brasileiro de Petroleo Ltda., 542 B.R. 899 (Bankr. S.D. Fla. 2015)), Judge Robert Mark rejected the first argument. He noted that U.S. courts grant a similar type of relief under the equitable remedy of substantive consolidation, and thus the Brazilian extension order was not substantively offensive as a matter of public policy. As to the ex parte nature of the proceedings, he acknowledged that this differs from U.S. procedure, which would have provided the remedy of substantive consolidation only upon an open hearing; however, he noted that the parties had the opportunity to be heard at the appellate level in Brazil. Consequently, the Brazilian proceeding did not offend U.S. public policy.

As to the scope of discovery assistance under Chapter 15, the court had to interpret the scope of “debtor” under section 1521(a)(4), which provides that a court may authorize the “the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities.”

Judge Mark held that the entities that were subject to the Brazilian extension order were “debtors” subject to section 1521’s discovery powers. As to third parties who were not subject to the Brazilian extension order, the bankruptcy court in Petroforte held the trustee may be entitled to broad discovery to the extent the debtor is a majority stockholder in the non-debtor discovery target. Such broad discovery “allows the Trustee to determine whether the stock, which is an asset of the estate, has sufficient value to induce the Trustee to take control of the entity, and attempt to derive value by selling or liquidating the entity.”

Broad Discovery Relief: In re SAM Industrias, S.A.
In re SAM Industrias, S.A., 2019 WL 1012790 (Bankr. S.D. Fla. March 1, 2019), built upon the foundation laid in Petroforte. In Petroforte, Judge Mark also suggested an alternative basis for ordering broad investigation into third party transactions in situations in which the third parties were actually involved in the fraudulent transfer or had otherwise engaged in wrongdoing: “The Trustee’s Supplemental Response failed to establish any actual involvement in the Plant Transaction or any wrongdoing by any of the Third Party Targets.” The court, though, did not further discuss this alternative ground.

The issue arose in SAM Industrias when the foreign representative of the Brazilian liquidation led a Chapter 15 in the Southern District of Florida to investigate potential fraudulent transferees identified by the Brazilian courts. The Brazilian courts had found that the debtor had undisclosed interests in certain corporate entities, which he had concealed by transferring to family members. The foreign representative, accordingly, sought the Chapter 15 court’s assistance in examining these family members, who were not themselves debtors in Brazil, and in examining certain non-debtor corporate entities.

The debtor objected to this assistance, arguing that the requested discovery assistance falls outside the scope of Chapter 15’s relief because the discovery targets were not debtors in Brazil. As to the family members, the Chapter 15 court examined the Brazilian court record carefully and concluded that discovery was appropriate as to those family members identified as transferees of the debtor’s property. The foreign representative, accordingly, was entitled to discover information related to the transferees’ corporate and financial affairs.

As to the non-debtor corporate entities, the foreign representative was entitled to broad discovery not only as to those entities in which the debtor had a majority interest but also in those entities found to have participated in the debtor’s asset concealment scheme. Again, in defining the scope of relief available to the foreign representative, the Chapter 15 court examined the findings of the Brazilian courts. The Brazilian courts had found that the debtor had concealed assets through certain corporate pass- throughs owned and controlled by the debtor. The foreign representative was thus entitled to discovery related to these corporate pass-throughs. The foreign representative, though, was not entitled to discovery related to the non-debtor entities whose connections to the debtor had not yet been established in the Brazilian courts. Accordingly, the court concluded that the foreign representative is not entitled to “carte-blanche in his inquiries of non-debtors,” but that he is entitled to obtain information narrowly tailored “to discover ‘the legal entities created in purely fictional form’ which are part of a ‘complex corporate structure’ obscuring” the debtor’s ownership of corporate assets.

The Foreign Revenue Rule: In re Dixon
In re Dixon (Case No. 16-bk-02453, M.D. Fla. March 23, 2016) illustrates Chapter 15’s exibility, as it required the court
to consider a novel application of the Foreign Revenue Rule to a Canadian trustee’s request for assistance. The Canadian debtors commenced proceedings in Canada under the Bankruptcy and Insolvency Act. The foreign representative subsequently led a Chapter 15 proceeding in the Middle District of Florida, seeking discovery assistance related to the debtor’s assets in the United States. When the foreign representative sought authorization to sell the debtors’ U.S. property in aid of the Canadian liquidation, the debtors led their own bankruptcy case under Chapter 13 of the Bankruptcy Code and later sought to dismiss the Chapter 15 proceedings. They argued that the Chapter 15 petition would violate the Foreign Revenue Rule.

The Foreign Revenue Rule is “a long- standing common law rule that prevents the courts of one sovereign from enforcing or adjudicating tax claims from another sovereign.” Here, the debtors’ principal obligations were unpaid tax debts owed in Canada. Republic of Honduras vs. Philip Morris Companies, Inc., 341 F.3d 1253, 1260 (11th Cir. 2003). The issue, as urged by the debtors, was whether a Chapter 15 court could order to liquidate U.S. property for the purpose of satisfying Canadian tax claims.

Judge Caryl Delano noted that the application of the Foreign Revenue Rule in the Chapter 15 context was a matter of first impression. Traditionally, in non- chapter 15 contexts, courts would refuse to permit a U.S. proceeding (whether in bankruptcy or not) to adjudicate tax claims under foreign laws. Section 1513(b)(2)(A) states that the language in subsection (a) and paragraph (1) “do not change or codify present law as to the allowability of foreign revenue claims or other foreign public law claims in a proceeding under this title.”

Section 1513(b)(2)(B) goes on to say “[a]llowance and priority as to a foreign tax claim or other foreign public law shall be governed by any applicable tax treaty of the United States, under the conditions and circumstances specified therein.”

The bankruptcy court ruled that the Revenue Rule did not apply because it was not being asked to “adjudicate or rule upon the validity or priority of the Canadian taxing authorities’ claims.” That matter, the court noted, would have to be decided in the Canadian proceeding. Second, the court noted that as a general matter, Chapter 15 courts are not in the business of adjudicating the validity of foreign claims. Finally, the court held that the case did not touch on any fundamental U.S. public policies, as it was simply a dispute as between the debtors and the foreign representative. In fact, the court found that it was promoting the public policies underlying not only Chapter 15 but the U.S.-Canada tax treaty. As an aside, the court noted that, to the extent the Canadian case involved more than just tax claims, that would further support its conclusion that the Foreign Revenue Rule does not apply.

Conclusion
These three Florida case descriptions illustrate how Chapter 15 of the Bankruptcy Code has elements of both bankruptcy law and more traditional asset recovery tools. When considering whether Chapter 15’s toolbox could help in the asset recovery effort, it appears the sun is shining in Florida’s bankruptcy courts.

Click here to read the full article.

Selling Assets in Chapter 15 Matters: Practical Considerations in Cross- Border Insolvencies

Asset sales under § 363 of the U.S. Bankruptcy Code [1] have become a critical component of the bankruptcy practitioner’s arsenal, and a preferred avenue of monetizing a debtor’s assets.

The process is generally straightforward, and the Bankruptcy Code provides the framework of how sales should proceed. U.S. practitioners have become well versed in the § 363 sale process and how to address recurring issues; however, chapter 15 of the Bankruptcy Code [2] adds an additional layer of complexity that must be observed and resolved carefully.

When the U.S. adopted chapter 15, it codified the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (“Model Law”). [3] Chapter 15 aimed to facilitate U.S. recognition of foreign insolvency proceedings and increase international cooperation among courts in cross-border insolvency cases. [4] However, the Model Law is a generic template for countries around to world to incorporate into their existing

insolvency laws. [5] Therefore, chapter 15’s adoption has created both conflicts and gaps as to how practitioners utilize the Bankruptcy Code to aid and facilitate cross-border insolvencies.

This article highlights how the application of and compliance with § 363 is an example of these conflicts and gaps, and it provides some thoughts on what to look out for and how to address some of these issues.

First: Is Relief Under § 363 Available?

Chapter 15 proceedings fork into two paths: one for foreign main proceedings and the second for foreign non-main proceedings. [6] Under § 1520 of the Bankruptcy Code, foreign main proceedings automatically obtain rights under a number of other Bankruptcy Code sections immediately upon recognition. [7] Section 1520, however, only applies to foreign main proceedings; foreign non-main proceedings do not receive any sort of automatic applications.

One of the sections automatically applied to foreign main proceedings is the right to sell property under § 363. [8] Therefore, if your proceeding is a foreign main proceeding, you are automatically entitled to utilize § 363 wherever and whenever appropriate.

Although § 363 is not automatically applied to non-main proceedings, it is still available, but it requires additional steps. Specifically, once a foreign non-main proceeding is recognized, relief must be sought from the court to authorize the application of § 363 to the proceedings. This request for relief is presented to the court under § 1521. Once the court grants the requested relief, the § 363 sale process becomes available to the non-main proceeding.

Section 1521 is a broad section of chapter 15 that allows the court, upon recognition of the proceedings, to provide additional relief to the foreign representative subject to limitations of the Bankruptcy Code and U.S. laws. [9] As such, the section can be used to utilize other provisions of the Bankruptcy Code that are not explicitly adopted or automatically applied in chapter 15, if that is necessary to assist the foreign representative.

Second: Which Assets Can Be Sold, and Which Court Approves the Sale?

Section 541 of the Bankruptcy Code is largely inapplicable in a chapter 15 proceeding. [10] An estate is never created in a typical chapter 15 proceeding. Section 363 contemplates the sale of property of the estate, so which assets are allowed to be sold under § 363 in chapter 15 proceedings? [11]

Section 1520’s adoption of § 363 modifies the section so that it applies to transfers of any interest of the debtor in property that is within the territorial jurisdiction of the U.S. to the same extent that the section would apply to property of an estate. [12] Therefore, the assets that can be sold under chapter 15 appear to be broader than in other bankruptcy contexts because it is not limited to the estate. Could this mean that a foreign representative could sell property of the debtor in the U.S., even if the debtor would have claimed it exempt, if the case were a domestic case? To date, there do not appear to be any cases deciding this point.

In Fairfield Sentry, [13] the Second Circuit analyzed what chapter 15 means by “transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States.” [14] Fairfield Sentry LLC was a BVI investment fund that filed customer claims in the SIPA liquidation of the Bernard L. Madoff Investment Securities LLC (BLMIS). Fairfield Sentry invested approximately 95 percent of its assets with BLMIS when Bernard Madoff’s Ponzi scheme became public. [15] As a consequence, Fairfield Sentry was placed into liquidation in the BVI in 2009, and in 2010 the U.S. Bankruptcy Court for the Southern District of New York recognized the foreign main proceeding. [16]

Fairfield Sentry ultimately decided it would sell the SIPA claims and entered into an agreement with Appellee Farnum Place, LLC to sell the claims for 31.125 percent of their value. [17] However, days after the parties entered into the agreement, the trustee for the BLMIS liquidation announced that he had entered into a settlement agreement that would increase the value of Fairfield Sentry’s SIPA claims from 32 percent to 50 percent of the total amount claimed. [18]

This substantial increase created tension between Fairfield Sentry’s liquidators and Farnum. The liquidators sought to cancel the sale, and

Farnum sought to enforce it. The BVI court approved the sale over the liquidators’ objections, but instructed the liquidators to question the U.S.

Bankruptcy Court as to whether § 363 applied and whether the section required disapproval of the sale. [19] Thereafter, the U.S. Bankruptcy Court rejected the liquidators’ application for disapproval of the proposed sale, and the district court affirmed.

However, the Second Circuit reversed the decisions of the lower courts on appeal, finding that the “property” in this case was the SIPA claims and that the SIPA claims were located in New York, “where the property could be assigned or transferred,” [20] and therefore that § 363 applied. The Second Circuit made clear that a bankruptcy court’s “principal responsibility … is to secure for the benefit of creditors the best possible bid,” and the sale of the SIPA claims was ultimately disapproved. [21]

Fairfield Sentry solidified that § 363 applies in chapter 15 whenever the asset to be sold is within the U.S. Moreover, Fairfield Sentry also set a line on the extent that comity will have in chapter 15 proceedings, and § 363 sales in particular. The Second Circuit rejected Farnum’s arguments that deference to the BVI decision was required, and the opinion makes clear that the court of the jurisdiction where the asset to be sold is located is the court with the ultimate approval of the sale.

Third: How Do I Give Notice, and Where Are Objections Heard?

One of the trickiest portions of utilizing § 363 in chapter 15 proceedings may be complying with the procedural requirements of the sale — specifically, notice to creditors and the hearing requirement. [22]

Whereas a creditor matrix is easily accessible in domestic bankruptcy proceedings, it is not always the case in cross-border proceedings. Chapter 15 does not require any schedules, a creditor matrix or a claims register. A chapter 15 case requires nothing more than an application, statement identifying the foreign proceedings, and evidence of the existence of the foreign proceeding and appointment of the foreign representative. [23]

In addition to the lack of traditionally relied-upon creditor information, some foreign jurisdictions make it difficult to locate the necessary creditor information. Also, the foreign representative might not always be the trustee of the foreign main proceedings, and therefore might not have direct access to the list of creditors. Every foreign jurisdiction is unique, and there are many factors that could lead to delays in utilizing § 363 in chapter 15 proceedings. You must prepare as best as possible to avoid any such delays.

Complicating matters further, sometimes the notice requirements in the foreign main jurisdiction might not comply with the requirements of the U.S. How, then, does one go about notifying the creditors, and what is considered sufficient notice?

In In re Banco Santos S.A., [24] a chapter 15 case filed in the Southern District of Florida, Hon. Laurel M. Isicoff addressed the issue of notice in the context of approving a settlement in a chapter 15 proceeding, which may be applied in the context of a § 363 sale. There were two separate instances where notice was required in Banco Santos. In the first instance, the foreign representative requested a bar order in favor of certain settling parties, and in the second instance, the foreign representative did not. [25] The court considered the nature and implications and the requests of the foreign representative for each instance. In the first instance (which requested a bar order), the court determined that directly mailing to each creditor in Brazil would be required, and in the second instance (which did not require a bar order), the court determined that notice via publication in the Brazilian Gazette, which is sufficient under Brazilian law, was sufficient despite the fact that notice by publication is generally insufficient in domestic proceedings. [26]

Judge Isicoff highlights in Banco Santos that in a chapter 15, the court has the ability and duty to look at the requests made and the nature and implications of the requests before making a determination. Ultimately, the more burdensome the request, the more stringent the notice requirement should be.

Similar to Fairfield Sentry, the property and assets to be sold in Banco Santos were located within the territory of the U.S. Therefore, to ensure compliance with the notice and hearing requirements of § 363, Judge Isicoff conditionally approved the pending sale and ordered any objections thereto be filed in the U.S. Judge Isicoff also ordered the foreign representative to request an order in the foreign main proceedings instructing any creditor with an objection to file them in the U.S. [27] This process created a simplified procedure to obtain approval of a sale while consolidating all objections into the appropriate jurisdiction.

Fourth: Who Can Assist in the Sales Process?

More often than not, professional persons need to be retained to assist in a sales process (an appraiser, auctioneer, realtor, etc.). The Bankruptcy Code lays out a clear process for how to go about hiring professional persons, and provides limitations on their compensation. [28] However, none of the relevant sections, including §§ 329 and 330, were adopted in chapter 15.

What recourse does the foreign representative have in situations where they enter into a bad deal with a professional person? Is the court then authorized to disapprove any agreements or appointments?

Ideally, § 1521 would allow the court to adopt any section of the Bankruptcy Code necessary, but what happens in a situation where the appointment of a professional person and their compensation is approved in the foreign main jurisdiction, but the appointment and compensation (while acceptable in the foreign main jurisdiction) would normally be considered unconscionable in the U.S.? It follows that the rationale in Fairfield Sentry will also apply here, but this is another situation that has not yet been challenged.

There are many benefits to the adoption of the Model Law through chapter 15, and utilization of chapter 15 has been steadily increasing since the chapter was enacted. This article addresses some of the methods of dealing with the gaps and conflicts created by chapter 15 and the general requirements of the Bankruptcy Code in the context of § 363 sales, although the dueling nature of two insolvency proceedings arising in two separate jurisdictions necessitates that bankruptcy practitioners be twice as diligent in their cases.

[1] Title 11 of the U.S. Code (the “Bankruptcy Code”). [2] 11 U.S.C. §§ 1501-1532.
[3] 11 U.S.C. § 1501.
[4] See generally 11 U.S.C. § 1501.
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[5] See www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html .
[6] “Foreign main proceeding” means a foreign proceeding pending in the country where the debtor has the center of its main interests. 11
U.S.C. § 1502 (4).
“Foreign non-main proceeding” means a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment. 11 U.S.C. § 1502 (5).
[7] See generally 11 U.S.C. § 1520.
[8] 11 U.S.C. § 1520(a)(2)-(3).
[9] See 11 U.S.C. § 1507(a); see also § 1521(a)-(b).
[10] Section 541 is only discussed in chapter 15 in relation to concurrent proceedings and in authorizing a representative of a domestic bankruptcy to act abroad; see 11 U.S.C. §§ 1528 (commencement of a case after recognition of foreign main proceeding) and 1505 (authorization to act in foreign country).
[11] 11 U.S.C. § 363(b)(1). (the “trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate…” (emphasis added); see also infra footnote 14.
[12] 11 U.S.C. § 1520(a)(2).
[13] In re Fairfield Sentry Ltd., 768 F.3d 239 (2d Cir. 2014).
[14] See Fairfield Sentry, 768 F.3d at 244; see also § 1520(a)(2).
[15] Id. at 241.
[16] Id.
[17] Id. at 242.
[18] Id.
[19] Id. at 243.
[20] Id. at 244.
[21] Fairfield Sentry, 768 F.3d at 246-47, quoting In re Fin. News Network Inc., 980 F.2d 165, 169 (2d Cir. 1992). [22] 11 U.S.C. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease…”) (emphasis added). [23] 11 U.S.C. § 1515.
[24] In re Banco Santos S.A., Case No. 10-47543-BKC-LMI.
[25] Banco Santos, Case No. 10-47543-BKC-LMI [D.E. 170, 184, 185].
[26] Id.
[27] Id. [D.E. 170, 185].
[28] 11 U.S.C. §§ 327, 328.

June 2019 Quarterly Newsletter

IWIRC announces 2019 founders award winners

By Benjamin Clarke

Award winners: Leyza Florin Blanco, Eloise Fardon and IWIRC’s London network co-chair Sonya Van de Graaff

The International Women’s Insolvency & Restructuring Confederation (IWIRC) has announced the recipients of its 2019 founders awards, with winners in Miami, Hong Kong and London.

Asset recovery column: The long arm of the liquidating trustee – Madoff trustee reaches offshore transferees

Christina Vicens Beard and Andrew Dawson / Sequor Law

Sequor Law attorney Cristina Vicens Beard and of counsel Andrew Dawson consider the implications for non-US entities of the US Second Circuit’s recent ruling that international comity principles should not stop clawback actions by the trustee of Bernie Madoff’s investment firm.