Chapter Fifteen Bankruptcy - Ancillary and Other Cross-Border Cases

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A Chapter fifteen bankruptcy is a recently added Bankruptcy Code Chapter by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It is the United States domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997, and it replaces section 304 of the Bankruptcy Code. Because of the UNCITRAL source for chapter fifteen, the United States interpretation must be coordinated with the interpretation given by other countries that have adopted it as internal law to promote a coordinated and uniform legal regime for cross-border insolvency cases.


(11 United States Code, Sub-Section- 1501)The purpose of a Chapter fifteen bankruptcy, and the Model Law on which it was based, is to provide effective mechanisms for dealing with insolvency cases involving assets, debtors, claimants, and other parties of interest involving more than one country. This general purpose is realized through 5 objectives specified in the statute. First, it is designed to promote cooperation between the U.S. courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases. Second, it is setup to establish greater legal certainty for investment and trade. Third, it is designed to provide for the effective and fair administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor. Fourth, it was created maximize the value of the debtor's assets and to afford protection. Lastly, it helps to facilitate the rescue of financially troubled businesses, thereby preserving employment and protecting investment.

Under normal circumstances, a chapter fifteen bankruptcy case is ancillary to a primary proceeding brought in another country, usually the debtor's home country. As an alternative, the creditor or a debtor may start a full chapter seven or chapter eleven case in the U.S. if the assets in the U.S. are sufficiently complex to merit a full-blown domestic bankruptcy case. 11 United States Code, Sub-Section- 1520(c). Also, under chapter fifteen a court of the United States may authorize a trustee or other entity (including an examiner) to act in a foreign country on behalf of a United States bankruptcy estate. 11 United States Code, Sub-Section- 1505.

An ancillary case is commenced under chapter fifteen bankruptcy by a "foreign representative" filing a petition for recognition of a "foreign proceeding." (1) 11 United States Code, Sub-Section- 1504. A Chapter fifteen bankruptcy gives the foreign representative the right of direct access to the courts of the United States for this purpose. 11 United States Code, Sub-Section- 1509. The petition must be accompanied by documents showing the authority and appointment of the foreign representative and the existence of the foreign proceeding. 11 United States Code, Sub-Section- 1515. After providing notice and having a hearing, the court is authorized to issue an order recognizing the foreign proceeding as either a "foreign non-main proceeding" (a proceeding pending in a country where the debtor has an establishment, (2) but not its center of main interests) or a "foreign main proceeding" (a proceeding pending in a country where the debtor's center of main interests are located). 11 United States Code, Sub-Section- 1517. Immediately upon the recognition of a foreign main proceeding, the automatic stay and selected other provisions of the Bankruptcy Code take effect within the United States. 11 United States Code, Sub-Section- 1520. The foreign representative is also authorized to operate the debtor's business in the ordinary course. As soon as the petition for recognition is filed, the United States court is authorized to issue preliminary relief. 11 United States Code, Sub-Section- 1519.

Through the recognition process, a Chapter fifteen bankruptcy operates as the principal door of a foreign representative to the state and federal courts of the U.S. 11 United States Code, Sub-Section- 1509. Once recognized, a foreign representative may seek additional relief from the bankruptcy court or from other state and federal courts and is authorized to bring a full (as opposed to ancillary) bankruptcy case. 11 United States Code, Sub-Section- 1509, 1511. In addition, the representative is authorized to participate as a party of interest in a pending U.S. insolvency case and to intervene in any other United States case where the debtor is a party. 11 United States Code, Sub-Section- 1512, 1524.

A Chapter fifteen bankruptcy also gives foreign creditors the right to participate in United States bankruptcy cases and it prohibits discrimination against foreign creditors (except certain foreign government and tax claims, which may be governed by treaty). 11 United States Code, Sub-Section- 1513. It also requires notice to foreign creditors concerning a United States bankruptcy case, including notice of the right to file claims. 11 United States Code, Sub-Section- 1514.

One of the most important goals of a Chapter fifteen bankruptcy is to promote communication and cooperation between courts of the United States and parties of interest with foreign courts and parties of interest in cross-border cases. This goal is accomplished by, among other things, explicitly charging the estate representatives and the court to "cooperate to the fullest extent possible" with foreign representatives and foreign courts and authorizing direct communication between the court and authorized estate representatives and the foreign representatives and foreign courts. 11 United States Code, Sub-Section- 1525 - 1527.

If a full bankruptcy case is initiated by a foreign representative (when there is a foreign main proceeding pending in another country), bankruptcy court jurisdiction is generally limited to the debtor's assets that are located in the U.S.. 11 United States Code, Sub-Section- 1528. The limitation promotes cooperation with the foreign main proceeding by limiting the assets subject to United States jurisdiction, so as not to interfere with the foreign main proceeding. A Chapter fifteen bankruptcy also provides rules for coordination of more than on foreign proceeding and also provides rules to further cooperation where a case was filed under the Bankruptcy Code prior to recognition of the foreign representative and. 11 United States Code, Sub-Section- 1529 - 1530.

The UNCITRAL Model Law has also been adopted (with certain variations) in Mexico, Canada, Japan and several other countries. Adoption is pending in the U.K. and Australia, as well as other countries with significant international economic interests.

NOTES:

A "foreign proceeding" is a "judicial or administrative proceeding in a foreign country ... under a law relating to insolvency or adjustment of debt in which proceeding the [debtor's assets and affairs] are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation." 11 United States Code, Sub-Section- 101(23). A "foreign representative" is the person or entity authorized in the foreign proceeding "to administer the reorganization or liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

An establishment is a place of operations where the debtor carries out a long term economic activity. 11 United States Code, Sub-Section- 1502(2).

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