Although Section 1521(a)(7) prohibits using a chapter 15 case to pursue avoidance actions under the Bankruptcy Code, a foreign representative can prosecute a fraudulent transfer suit under state or foreign law, according to Bankruptcy Judge Laurel M. Isicoff of Miami.
In her March 23 opinion, Judge Isicoff faced the issue in the wake of the bankruptcy liquidation of a Brazilian bank, where the Brazilian trustee had sought and obtained recognition of a foreign main proceeding under Section 1517. The Brazilian trustee then filed suit in bankruptcy court to recover assets in the U.S. that were allegedly purchased with funds diverted from the bank.
The suit made claims based on New York State fraudulent transfer law, Brazilian law, and theories of aiding and abetting.
The defendants moved to dismiss, contending that Section 1521(a)(7) prohibits a foreign representative from bringing avoidance actions.
The section says that granting recognition permits the bankruptcy court to grant “any additional relief that may be available to a trustee,” but not “relief available under” Sections 544, 547, 548 and 550, among others. In other words, a foreign representative may not mount preference of fraudulent transfer suits relying on the avoiding powers in the Bankruptcy Code.
Judge Isicoff denied the motion to dismiss and allowed the suit to proceed. She held that “Section 1521(a)(7) does not prohibit a foreign representative from bringing avoidance claims that are available to the foreign representative generally under non-bankruptcy law.”
Stated in other terms, Judge Isicoff said the foreign representative has “standing irrespective of any rights that would otherwise be available to a bankruptcy trustee.”
To reach this conclusion, Judge Isicoff said that Section 1509(f) “makes clear that ‘the failure of a foreign representative to commence a case or to obtain recognition under [chapter 15] does not affect any right the foreign representative may have to sue in a court of the United States to collect or recover a claim which is the property of the debtor.’”
She said that the ability of the foreign representative to sue under New York fraudulent transfer law did not stem from his capacity as the foreign representative. Rather, the right to sue was based on his status as the Brazilian bankruptcy judicial administrator and rights conferred by Brazilian law.
“There is absolutely nothing in any part of chapter 15 that remotely suggests that a foreign representative may never bring an avoidance claim that the foreign representative has the direct right to bring in his or her capacity as the foreign representative,” Judge Isicoff said.
Without relying on his status as a representative of creditors under the Bankruptcy Code, Judge Isicoff said that the foreign representative had the right to sue under New York law as someone who “represents the creditors of the estate under Brazilian law.”
For the same reasons, Judge Isicoff said the foreign representative could pursue claims for a constructive trust or equitable liens.
The opinion is Laspro Consultores Ltda. v. Alinia Corp. (In re Massa Falida do Banco Cruziero do Sul SA), 16-1315 (Bankr. S.D. Fla. March 23, 2017).