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

By Leyza B. Florin, 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.

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.

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