A bad faith filing is no basis for denying recognition of a foreign main proceeding under chapter 15 “if all three requirements of § 1517(a) are met,” the Ninth Circuit Bankruptcy Appellate Panel recently held.
A foreign representative is entitled to recognition even if the filing was not a legitimate use of chapter 15, Bankruptcy Judge Julia W. Brand said in her February 17 opinion for the BAP.
Before concluding that the BAP lost its mind by condoning bad faith, be sure to read the end of this report, where Judge Brand lays out the relief available to a creditor who can show that chapter 15 is being misused.
The Bankruptcy in Monaco
Incorporated in Monaco, the debtor was the sole distributor in Europe for a California-based producer of lubricants. The California creditor held 96% of the debt owing by the debtor.
The creditor alleged that the debtor had misappropriated its trade secrets and customer lists to establish a competing business. The creditor initiated an arbitration in California where the arbitrator awarded the creditor almost $1.1 million. The federal court in California confirmed the arbitration award.
Believing that the debtor’s owner had fraudulently transferred the debtor’s assets, the creditor was undertaking discovery in California aimed at identifying assets or transfers of assets.
The debtor filed an insolvency proceeding in Monaco followed by a chapter 15 petition in Oakland, Calif. The chapter 15 filing imposed an automatic stay on discovery.
The Monegasque trustee sought recognition of the proceedings in Monaco as a foreign main proceeding under Section 1517(b)(1). The creditor opposed.
The creditor argued in bankruptcy court that the Monegasque bankruptcy and the chapter 15 cases were shams to protect the debtor’s owner and shield fraudulently transferred assets.
Among other things, the bankruptcy court found that the owner was paying the Monegasque trustee’s attorneys’ fees and that the trustee’s lawyers had also represented the debtor in California district court. According to Judge Brand, the bankruptcy judge found that the trustee was not a “true fiduciary” and that the facts “cast doubt on the integrity of the proceeding and [the debtor’s] good faith.”
The bankruptcy court denied recognition, concluding that the case was not a legitimate use of chapter 15 for the purposes intended by Section 1501. According to Judge Brand, the bankruptcy court “believed that the real purpose of the filing was to preclude [the creditor] from recovering on its Judgment and to protect [the owner and another business he owned] from their own wrongful conduct.”
“Because the [bankruptcy] court found the filing to be improper under § 1501, it made no findings under § 1517,” Judge Brand said. The debtor appealed to the BAP, which reversed.
The Standards for Recognition
Judge Brand devoted several pages to laying out the nuts and bolts of reorganization and liquidation proceedings in Monaco. Although insolvencies in Monaco do not mimic U.S. bankruptcies precisely, the Monegasque law struck this writer as similar to the laws of other countries entitled to recognition under chapter 15.
Judge Brand laid out the two most relevant statutes, Sections 1501 and 1517(a).
Section 1501 contains the statement of purpose for chapter 15, including cooperation between courts in the U.S. and those abroad with the provision of “effective mechanisms for dealing with cases of cross-border insolvency.”
Section 1517(a) demands that recognition “shall” be granted if (1) the foreign proceeding is main or non-main, (2) the foreign representative is a person or body and (3) the petition meets the requirements of Section 1515.
In bankruptcy court, there had been no dispute about the satisfaction of the three requirements.
Reversal was foretold early in her opinion when Judge Brand said she “could not locate . . . another case where a court has applied § 1501 to determine recognition of a foreign proceeding.” She said that the bankruptcy court “impermissibly engaged in a more discretionary analysis than what recognition under § 1517 authorizes.”
Judge Brand said that “Section 1501 does not control recognition of a foreign proceeding. Rather, recognition is governed by §§ 1515 through 1524.”
However, there is a safety valve in Section 1506, Judge Brand said. It says,
Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.
In other words, “recognition is mandatory if all three requirements of § 1517(a) are met and there is no public policy basis to deny it,” Judge Brand said.
Given that the requirements of Section 1517(a) were satisfied, Judge Brand examined whether recognition would be “manifestly contrary” to U.S. public policy.
With the facts not in dispute, Judge Brand found nothing “manifestly contrary” to U.S. public policy. She analyzed several other chapter 15 cases where “a party’s misconduct or bad faith [was] not a proper basis for invoking § 1506 to deny recognition.” She cited a case with “more egregious” facts where recognition had been granted.
Judge Brand reversed and ruled that the proceedings in Monaco were entitled to foreign main recognition.
The Safety Valve
Although the foreign proceeding was entitled to recognition, Judge Brand said the court is not “helpless when faced with misconduct or bad faith in a chapter 15 case.” After recognition, she said that the court “has a considerable amount of discretion.”
If there is misconduct or bad faith, Judge Brand said that the court’s tools include relief from the automatic stay, abstention or dismissal.
A bad faith filing is no basis for denying recognition of a foreign main proceeding under chapter 15 “if all three requirements of § 1517(a) are met,” the Ninth Circuit Bankruptcy Appellate Panel recently held.
A foreign representative is entitled to recognition even if the filing was not a legitimate use of chapter 15, Bankruptcy Judge Julia W. Brand said in her February 17 opinion for the BAP.
Before concluding that the BAP lost its mind by condoning bad faith, be sure to read the end of this report, where Judge Brand lays out the relief available to a creditor who can show that chapter 15 is being misused.