Filing of Adversary Proceeding Against Chapter 15 Debtor Violated Automatic Stay, and "Home Court" Rule Does Not Apply in Chapter 15 Cases
It is generally well understood that an order of a U.S. bankruptcy court recognizing a debtor's foreign bankruptcy case as a "main" proceeding under chapter 15 of the Bankruptcy Code triggers the automatic stay preventing creditor collection efforts against the debtor and its U.S. assets. However, as illustrated by a ruling handed down by the U.S. District Court for the District of Delaware, the scope of the automatic stay in chapter 15 cases is more circumscribed than in cases under other chapters of the Bankruptcy Code in keeping with the purpose of chapter 15 and the limited role of a U.S. bankruptcy court, the mandate of which after recognition of a foreign bankruptcy case is to cooperate with, and provide assistance to, the foreign bankruptcy court and the debtor's foreign representative.
In In re Point Investments, Ltd. (In Liquidation), 2024 WL 4262832 (D. Del. Sep. 23, 2024), the district court affirmed a bankruptcy court ruling voiding the commencement of an adversary proceeding against a chapter 15 debtor as a violation of the automatic stay and denying the creditor's request for relief from the stay. According to the district court, the "home court" rule whereby the filing of an adversary proceeding against a debtor is treated as a proof of claim (rather than a stay violation) does not apply in chapter 15 cases because, unlike in cases under other chapters of the Bankruptcy Code, there is no bankruptcy estate created in the United States by the filing of a chapter 15 petition, and a U.S. bankruptcy court does not adjudicate creditor claims in a chapter 15 case.
The Automatic Stay
Section 362(a) of the Bankruptcy Code provides that, upon the filing of a petition for relief—whether voluntary, joint, or involuntary—under almost any chapter of the Bankruptcy Code (except for chapter 15, which applies to petitions for "recognition" in the United States of bankruptcy proceedings filed abroad), most but not all actions against the debtor or its property to collect on a pre-bankruptcy debt are enjoined unless the "automatic stay" expires by operation of another provision in the statute or the court orders otherwise. Actions taken in violation of the stay are either void or voidable, depending upon the prevailing rule in the jurisdiction. See generally Collier on Bankruptcy ("Collier") ¶ 362.12[1] (16th ed. 2024). Moreover, where a violation of the stay is "willful," the Bankruptcy Code establishes a mechanism both to provide compensation for the offense and to punish the offender. See 11 U.S.C. § 362(k).
Under section 362(d), a bankruptcy court can grant relief from the automatic stay, "such as by terminating, annulling, modifying, or conditioning such stay," upon a showing of: (i) "cause," including the lack of "adequate protection" of an interest in property of the party seeking stay relief; (ii) the debtor's lack of equity in property that is not necessary for an effective reorganization; and (iii) a "single asset real estate" debtor's failure within 90 days of the petition date (with certain exceptions) either to file "a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time," or to commence monthly interest payments to any mortgagee. Under the conditions specified in section 362(e), the automatic stay terminates 30 days after a stay relief motion is filed under section 362(d), unless the court orders otherwise. The bankruptcy court "shall" also grant stay relief under section 362(f) if "necessary to prevent irreparable damage" to a third party's interest in estate property before there is an opportunity for notice and a hearing on its stay relief motion.
The scope of the automatic stay is generally limited to the debtor, the debtor's property, and property of the bankruptcy estate. However, in some cases, bankruptcy courts have expanded the scope of the stay to include actions against non-debtors, particularly where continuation of litigation would interfere significantly with a debtor's reorganization, or the debtor is a necessary party and the real party-in-interest. See Collier at ¶ 362.03[3][d].
Although the automatic stay precludes commencement or continuation of litigation against a debtor that was or could have been commenced prior to the bankruptcy petition date (see 11 U.S.C. § 362(a)(1)), a judicially created exception referred to as the "home court" rule permits the filing of an "adversary proceeding" against the debtor. (i.e., discrete litigation filed in a bankruptcy case, for example, to determine the validity, priority, or extent of a lien; determine the dischargeability of a debt; obtain injunctive relief; or subordinate a claim (see Fed. R. Bankr. P. 7001)). See Sharf v. BC Liquidating, LLC, 2015 WL 5093097, at **4–5 (E.D.N.Y. Aug. 28, 2015); In re Transcolor Corp., 296 B.R. 343, 358 (Bankr. D. Md. 2003); In re Atreus Enterprises, Ltd., 120 B.R. 341, 346 (Bankr. S.D.N.Y. 1990).
The rationale underlying the rule is that the "filing of an adversary proceeding against a debtor in the 'home' bankruptcy court is equivalent to the filing of a proof of claim in the Debtor's bankruptcy case and, therefore, does not violate the automatic stay." In re Uni Marts, LLC, 405 B.R. 113, 129 (Bankr. D. Del. 2009); see also In re Bird, 229 B.R. 90, 95 (Bankr. S.D.N.Y. 1999) ("Such suits against the debtor can be considered the functional equivalent of filing a proof of claim against the bankruptcy estate…. The bankruptcy court is invested with the authority, mandate and power to determine and allow claims against the debtor, despite the automatic stay…. If this exception did not exist, courts would be left with the absurd result of having to modify the automatic stay to allow a creditor to move to lift the stay in the first place.") (citations omitted).
The Automatic Stay in Chapter 15 Cases
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895).
Section 1501(a) of the Bankruptcy Code states that the purpose of chapter 15 is to "incorporate the [Model Law] so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of," among other things, cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border cases to protect the interests of all stakeholders, protection and maximization of the value of a debtor's assets2, and the rehabilitation of financially troubled businesses.
Section 1508 requires U.S. courts interpreting chapter 15 to "consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions."
Under chapter 15, a duly-accredited representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." See 11 U.S.C. § 1515.
"Foreign proceeding" is defined as:
a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
11 U.S.C. § 101(23). Because more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the United States of both a main proceeding—a case pending in the country that contains the debtor's "center of main interests"—and nonmain proceedings, which may have been commenced in countries where the debtor merely has an "establishment." 11 U.S.C. § 1502(4) and (5).
As noted previously, unlike in cases filed under other chapters of the Bankruptcy Code, the filing of a petition for recognition of a foreign bankruptcy case under chapter 15 does not trigger the automatic stay. Instead, the stay generally applies only at such time that the U.S. bankruptcy court later enters an order recognizing the foreign bankruptcy as a "main" proceeding under chapter 15 or, in the event of recognition as a foreign "nonmain" proceeding, the court exercises its discretion to grant equivalent provisional relief. See 11 U.S.C. §§ 1520(a)(1) (providing that, upon recognition of a foreign main proceeding, the automatic stay protects "the debtor and the property of the debtor that is within the territorial jurisdiction of the United States") and 1521(a) (giving the court, after recognition of a main or nonmain proceeding, the authority to grant injunctive relief to protect "the debtor's assets, rights, obligations or liabilities" if such relief is necessary to protect the debtor's assets or the interests of creditors); see also 11 U.S.C. § 1519(a)(1) (authorizing the court to grant certain injunctive relief prior to chapter 15 recognition).
Notably, chapter 15, unlike the other chapters of the Bankruptcy Code, does not incorporate the concept of a bankruptcy estate consisting of the foreign debtor's property as of the bankruptcy filing date. See In re Condor Ins. Ltd., 601 F.3d 319, 327 (5th Cir. 2010); In re OneTRADEx, Ltd., 645 B.R. 184, 187 (Bankr. S.D.N.Y. 2022) (citing In re Fairfield Sentry Ltd., 458 B.R. 665, 683 (S.D.N.Y. 2011) and In re Lupatech S.A., 611 B.R. 496, 503 (Bankr. S.D.N.Y. 2020)); see also 11 U.S.C. § 103(a) (omitting section 541 of the Bankruptcy Code, which defines the scope of the bankruptcy estate, from applicability in chapter 15 cases). Instead, a foreign debtor's property is administered by the foreign court overseeing its bankruptcy case, with the cooperation and assistance (after chapter 15 recognition) of a U.S. bankruptcy court having jurisdiction over the debtor's property located in the United States. See In re Manley Toys Ltd., 2018 WL 1071167, at *2 (Bankr. D.N.J. Feb. 23, 2018) ("To determine what constitutes 'property of the estate', the Court must look to the controlling law where the foreign main proceeding is located.") (citation omitted).
Likewise, because there is no bankruptcy estate in a chapter 15 case, creditors of a foreign debtor do not file claims in the U.S. bankruptcy court, and the court does not allow or disallow claims as it would in a case under another chapter of the Bankruptcy Code. See 11 U.S.C. § 101(3)(a) (omitting from chapter 15 cases the claims filing and allowance provisions in chapter 5 of the Bankruptcy Code). Instead, creditor claims must be filed in, and resolved by, the foreign bankruptcy court overseeing the debtor's bankruptcy case.
Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing that "[n]othing 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."
Point Investments
Point Investments Ltd. (the "debtor") was a private investment fund incorporated in Bermuda. The debtor was the sole limited partner of Falcata Tech Investment Fund I, L.P. ("Falcata"), a Cayman Islands-incorporated investment fund. Under Falcata's limited partnership agreement, the debtor was obligated to make certain capital contributions. In August 2020, Falcata's manager notified the debtor that its failure to make a $625,000 capital contribution on July 1, 2020, was a breach of the agreement and that the debtor was a "defaulting partner."
On September 16, 2020, a winding-up petition was filed on behalf of the debtor under the Bermuda Companies Act (the "BCA"). The Bermuda court appointed joint liquidators for the debtor in 2021 and entered an order commencing the winding-up proceeding in early 2022 (the "Bermuda Proceeding").
On March 29, 2022, the liquidators, as the debtor's foreign representatives (the "FRs"), filed a petition in the U.S. Bankruptcy Court for the District of Delaware (the "bankruptcy court") seeking chapter 15 recognition of the Bermuda Proceeding. On April 22, 2022, the bankruptcy court entered an order recognizing the Bermuda Proceeding as a foreign main proceeding, thereby triggering the automatic stay.
On March 3, 2023, Falcata filed an adversary proceeding against the debtor in the bankruptcy court for breach of contract under the limited partnership agreement and a related master transaction agreement. Shortly afterward, the FRs notified Falcata that the litigation was commenced in violation of the automatic stay, prompting Falcata to file a motion seeking either a determination that the automatic stay did not apply, or an order granting relief from the stay to continue with the adversary proceeding. The FRs responded by filing a motion for an order enforcing the stay.
On May 19, 2023, the FRs, in accordance with the Bermuda court's winding-up order, issued a notice to the debtor's creditors that the deadline for filing claims in the Bermuda Proceeding was June 9, 2023.
On May 25, 2023, the bankruptcy court ruled that: (i) the automatic stay applied, thereby voiding the filing of Falcata's complaint; (ii) the home court rule does not apply in a chapter 15 case "because the foreign main proceeding provides the home court"; (iii) no relief from the automatic stay was warranted; and (iv) the Bermuda Proceeding was the proper forum for the dispute. In so ruling, the bankruptcy court found that Falcata would not be prejudiced by having to assert its claims against the debtor in the Bermuda court, and that, by contrast, the debtor would be prejudiced "if it were required to address claim issues in two different countries, particularly when this proceeding here is under Chapter 15, and claims matters are not resolved here." See In re Point Investments, Ltd. (In Liquidation), No. 22-10261 (TMH) (Bankr. D. Del.), Tr. of May 25, 2023, Hearing, at 82–88 [Doc. No. 91].
Falcata appealed the bankruptcy court's order to the U.S. District Court for the District of Delaware.
The District Court's Ruling
The district court affirmed the bankruptcy court's ruling.
Initially, Chief U.S. District Court Judge Colm F. Connolly explained that, once the bankruptcy court recognized the Bermuda Proceeding as a foreign main proceeding under chapter 15, the automatic stay precluded the commencement of Falcata's adversary proceeding in accordance with the plain language of section 1520(a)(1) of the Bankruptcy Code. Because the adversary proceeding sought monetary damages and declaratory relief against the debtor based on its prepetition conduct, Judge Connolly noted, the "proceeding therefore fit within the prohibitions set forth in § 362(a)(1)," which is made applicable to chapter 15 cases following foreign main proceeding recognition by section 1520(a)(1). Point Investments, 2024 WL 4262832, at *4 (citing In re Nortel Networks UK Ltd., 538 B.R. 699, 704 (Bankr. D. Del. 2015)).
The district court rejected Falcata's argument that the court should "ignore the Bankruptcy Code's plain text and should invent an exception to the automatic stay's application in Chapter 15 cases." Id. According to Judge Connolly, the bankruptcy court's ruling comported with both the plain language and purpose of chapter 15, which is to "provide effective mechanisms for dealing with cases of cross-border insolvency in order to promote the fair and efficient administration of foreign bankruptcy proceedings and protect the interests of creditors, debtors, and other interest parties in those proceedings." Id. at *5 (quoting Principal Growth Strategies, LLC v. AGH Parent LLC, 615 B.R. 529, 533 (D. Del. 2020)) (emphasis added) (internal quotation marks omitted).
The Bankruptcy Code effectuates this purpose by, among other things, incorporating the automatic stay into chapter 15 cases, while expressly excluding the claims resolution provisions set forth in section 501. "Through this statutory structure," Judge Connolly wrote, "claims against a foreign debtor in a Chapter 15 case are channeled to the debtor's foreign main proceeding," where the foreign court will adjudicate such claims for the purpose of making distributions to the foreign debtor's creditors. Id.
Therefore, the district court ruled, the bankruptcy court correctly refused to adjudicate Falcata's claims against the debtor in the adversary proceeding. That ruling, Judge Connolly emphasized, "is further supported by other fundamental aspects of Chapter 15, including a respect for international comity that underlies the purposes of Chapter 15." Id. (citing 11 U.S.C. § 1501(a)(1) (listing as an objective of chapter 15 "cooperation between … courts of the United States … and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases")). According to the district court, "principles of international comity weigh strongly against permitting Falcata's adversary proceeding to continue within the United States." Id.
Next, the district court held that the home court rule does not apply in chapter 15 cases because the rationale for the rule—i.e., the filing of an adversary proceeding against a debtor is equivalent to the filing of a proof of claim, which does not violate the automatic stay—does not exist in chapter 15 cases, where there is no claims adjudication process because all claims are adjudicated by the foreign bankruptcy court. Id. at *6. Judge Connolly noted that Falcata failed to cite a single case in which an adversary proceeding against a chapter 15 debtor was permitted unless it was either brought by a foreign representative or allowed after the bankruptcy court granted relief from the automatic stay. Id. at *7.
The district court also concluded that the bankruptcy court's ruling did not deprive Falcata of an opportunity to adjudicate its claims against the debtor. According to Judge Connolly, Falcata could have sued the debtor on those claims in a U.S. court at any time prior to the chapter 15 petition date, it could have sought leave (even after the chapter 15 petition date) from the Bermuda court to sue the debtor in the Cayman Islands, or it could have asserted a proof of debt in the Bermuda Proceeding. The district court rejected Falcata's argument that Bermuda is "an unfair 'foreign haven' that guards debtors from their foreign creditors," noting that multiple U.S. bankruptcy courts have determined that Bermuda bankruptcy proceedings may be recognized under chapter 15 and that such relief is not manifestly contrary to U.S. public policy within the meaning of section 1506 of the Bankruptcy Code. Id. at *8.
Finally, the district court held that the bankruptcy court properly exercised its discretion in denying Falcata's motion for relief from the automatic stay. Among other things, Judge Connolly emphasized that the FRs demonstrated that prejudice to the debtor from permitting the adversary proceeding to continue outweighed any prejudice to Falcata arising from having to submit its claims for adjudication in the Bermuda Proceeding. Id. at *10.
Outlook
The Delaware district court's decision in Point Investments illustrates some of the significant differences between cross-border bankruptcy cases under chapter 15 of the Bankruptcy Code and cases under other chapters. Those distinctions are premised on the auxiliary role played by U.S. bankruptcy courts in assisting, in the interests of international comity, foreign bankruptcy courts and the duly-appointed representatives of foreign debtors whose foreign bankruptcy or restructuring proceedings are recognized in the United States under chapter 15. Key takeaways from the ruling include:
- Unlike in cases under other chapters of the Bankruptcy Code, the automatic stay preventing collection efforts against a debtor and its assets is not triggered by the filing of a chapter 15 petition, but comes into force when the U.S. bankruptcy court enters an order recognizing the debtor's foreign bankruptcy case as a main proceeding, unless the court exercises its discretion to grant equivalent provisional relief prior to recognition.
- There is no bankruptcy estate created upon the filing of a chapter 15 petition or recognition of a foreign debtor's non-U.S. bankruptcy proceeding. Instead, the debtor's estate is administered as part of its foreign bankruptcy proceeding, where creditor claims must be asserted and adjudicated by the foreign bankruptcy court.
- The filing of an adversary proceeding in a U.S. bankruptcy court against a chapter 15 debtor after the court recognizes the debtor's bankruptcy case as a foreign main proceeding is a violation of the automatic stay unless the bankruptcy court grants relief from the stay for that purpose. The "home court" rule does not apply in chapter 15 cases because a U.S. bankruptcy court does not adjudicate creditor claims in a chapter 15 case.
- A U.S. creditor is generally not unduly prejudiced by having to pursue its claim against a foreign debtor in a foreign bankruptcy court presiding over a bankruptcy proceeding that has been recognized under chapter 15.
- Foreign representatives can utilize the various tools provided in chapter 15 to channel all creditors and interested parties to the foreign proceeding to assert their rights, litigate claims, and participate in the foreign proceeding. Just as U.S. bankruptcy courts expect foreign parties to participate in chapter 11 proceedings and respect the chapter 11 process, U.S. bankruptcy courts will require U.S. parties to participate in foreign proceedings and respect the process and procedures of foreign proceedings recognized under chapter 15.
