Jamie Vang
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Under chapter 15 of title 11 of the United States Code (“Bankruptcy Code”), a bankruptcy court must approve the sale of a debtor’s assets located within the United States.[1] In particular, section 1520 of the Bankruptcy Code provides that “sections 363, 549, and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdictions of the United States to the same extent that the section would apply to property of an estate.”[2] Following recognition of a Canadian proceeding in the chapter 15 cases of Goli Nutrition Inc., the Foreign Representative filed a motion in the United States Bankruptcy Court for the District of Delaware (“Court”) to enforce a Canadian court’s order approving the debtor’s sale of inventory located in the United States.[3] In the Canadian proceeding, the Canadian court approved the sale of the assets over the objection of a third party that contested the debtor’s ownership, finding that the inventory was “not necessary for the go forward business.”[4] Additionally, the Canadian court required the debtor’s estate to set aside $1 million from the sale proceeds to address potential claims by the third party, which it would address at a subsequent hearing.[5] In the United States, the same party objected to the Court’s approval of the sale, arguing that the Court had in rem jurisdiction over the disputed assets, and thus the Court, not the Canadian court, had the responsibility to approve the transfer of the assets.[6] The Foreign Representative argued that the Court should defer to the Canadian court on the sale of the inventory.[7] The Court “easily” concluded that under sections 1520 and 363, the Court was required to approve the sale and not simply defer to the Canadian Court’s prior ruling. In this instance, the Court concluded that the sale was the result of good faith negotiations and could generally be approved under sections 1520 and 363.[8] However, the party’s claim to ownership raised two principal concerns for the Court. First, did the ownership dispute have to be decided before the Court could approve the sale. Second, which court must decide this dispute?[9]
According to the Court, there is “nothing in section 363 of the Code that permits [the Court] to authorize the sale of property that is not property of the estate.”[10] Thus, the Court could not authorize the sale of the property until the ownership issue was determined.[11] The Court, however, found that the law was unclear as to which court must decide the ownership dispute. According to the Court, the reported decisions alternated between permissive and mandatory language of when a U.S. court may or must decide a property ownership dispute while a parallel foreign bankruptcy proceeding is ongoing.[12] Based on the limited case law, the Court ruled that either court could determine the ownership of property.[13] Because the Canadian court already held a hearing related to this ownership dispute and had scheduled a second hearing to consider the issue, the Court concluded that it was appropriate for it to defer the ownership dispute to the Canadian court.[14]Accordingly, the Court held the liquidation motion in abeyance until the ownership decision was made.[15]
Under chapter 15 of the Bankruptcy Code, a debtor may sell assets which are in the United States. Following U.S. recognition, such a sale will be governed by section 363, which allows a debtor generally to sell its assets. If there is a dispute as to ownership, a court may determine ownership. However, the Bankruptcy Code is silent as to which court should make this determination. If the ownership issue is pending in a court elsewhere, a U.S. court may defer to that court to resolve the issue.
[1] See 11 U.S.C. § 363 (2018).
[2] Id. § 1520(a)(2).
[3] See In re Goli Nutrition Inc., No. 24-10438 (LSS), 2024 WL 1748460, at *1 (Bankr. D. Del. Apr. 23, 2024).
[4] Id. at *3.
[5] See id. at *4.
[6] See id. at *3.
[7] See id. at *4.
[8] See id. at *5
[9] See id.
[10] Id.
[11] See id. at *5–6.
[12] See id. at *6–7; In re Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc., 961 F.2d 341 (2d Cir. 1992) (concluding that because the foreign representative had asked a United States court for relief in their section 304 case, “the bankruptcy court whose authority was invoked must determine the legitimacy of that invocation”); JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. DE C.V., 412 F.3d 418 (2d Cir. 2005) (reaffirming Koreag’s rule that “U.S. courts may resolve bona fide questions of property ownership arising under local law while a foreign bankruptcy proceeding is ongoing without deferring to the parallel foreign proceeding.”).
[13] See id. at *8.
[14] See id.
[15] See id.
