Bankruptcy Judge Laurie Selber Silverstein of Delaware explored untested questions under chapter 15: Does the bankruptcy court or the foreign court have authority to sell a foreign debtor’s property in the U.S., and should the bankruptcy court or the foreign court resolve disputed ownership of the foreign debtor’s property in the U.S.?

The Canadian debtor was in proceedings in Canada under the Companies’ Creditors Arrangement Act, or CCAA. To effect a reorganization, the Canadian monitor for the debtor was proposing a restructuring known as a reverse vesting order, or RVO. It worked like this:

The debtor would issue new stock to be purchased by a new company we shall call Newco. The debtor would cancel all of its outstanding stock. A new Canadian company, which we shall call Oldco, would take residual assets and liabilities that Newco doesn’t want. Oldco would replace the debtor as the debtor in the CCAA proceedings in Canada. The debtor would exit the CCAA proceedings.

The Canadian court approved the RVO. The debtor’s foreign representative filed a chapter 15 petition and sought foreign main recognition alongside approval of the RVO under Section 363, including the transfer of assets free and clear of liens, claims and encumbrances.

No one objected to recognition, but one creditor objected to the sale. The creditor claimed ownership of property in California that the debtor claimed to own. The Canadian court had begun proceedings to decide who owned the California property. The debtor intended to sell the California property and hold the proceeds until the court decided who the owner was.

Given the lack of opposition, Judge Silverstein granted foreign main recognition in her April 23 opinion, saying that “CCAA proceedings are consistently recognized by courts in the United States.”

Which Court Sells Property in Chapter 15?

Judge Silverstein confronted the question of whether she could or should approve the RVO under Section 363. Given the lack of opposition, she approved the RVO but said,

I do not know how I would rule on a similar reverse vesting transaction if there were objections . . . . [T]he order I enter should not be cited in future motions for the proposition that U.S. courts have unconditionally approved such transactions.

To make the transfers free and clear under U.S. law, Judge Silverstein nonetheless said she would not “approve the entire transaction, independently, under section 363 of the Bankruptcy Code.” She gave several reasons.

First, the debtor was not selling assets, it was issuing stock. Second, if it were a sale, Section 1520(a)(2) would apply. The subsection says that “sections 363, 549, and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the sections would apply to property of an estate.” [Emphasis added.]

“Accordingly,” Judge Silverstein said, “I will not separately approve the entire Subscription Agreement and reverse vesting transaction under section 363 of the Code as requested.”

Still, Judge Silverstein said there was one element of the transaction that “may require my approval.” She was referring to the proposed sale of the California property subject to a dispute about ownership. The objectors wanted no sale until ownership was decided.

Referring to Section 1520(a)(2), Judge Silverstein said that she had ruled in a prior case that the U.S. court has in rem jurisdiction over the foreign debtor’s assets in the U.S. and it is therefore “charged with approving transfers of those assets.” She said she was “persuaded” by cases that “require me to apply the 363 standard to the transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States.”

Judge Silverstein “easily concluded” that the standards for approving a sale under Section 363 were met, but there was still the question of ownership and which court should rule on ownership.

Without a decision on ownership, Judge Silverstein saw “nothing in section 363 of the Code that permits me to authorize the sale of property that is not property of the estate.” Furthermore, she saw “nothing in section 363 that permits me to relegate the non-debtor owner of property to proceeds of a sale process.”

“[I]n order to invoke the ‘free and clear’” sale, Judge Silverstein said, “the trustee must first own the property.” She said that “Section 363(f) does not provide independent authority for a trustee to sell assets.”

“Rather,” Judge Silverstein said, “section 363(f) provides for a free and clear sale of property that can be sold by the Trustee under subsection (b) or (c). So, in order to invoke the ‘free and clear’ sale, the trustee must first own the property.”

Having decided that she could not sell property that the debtor might not own, she had put herself back in the position of being required to decide which court could or should resolve the ownership dispute. Were it a chapter 11 case, she said that she would have deferred to the Canadian court because the ownership dispute was already in litigation there. But, she asked, “does the fact that this is a chapter 15 case change that result?”

Judge Silverstein found “no clear guidance . . . on which court must decide the ownership issue.” Performing her own research in limited time, she concluded that “this Court can decide the ownership dispute, but need not do so in an appropriate circumstance.”

With a hearing on ownership scheduled in Canada within two weeks, Judge Silverstein decided to allow the Canadian court to proceed. She held the sale-approval motion “in abeyance” pending a decision from Canada on ownership.