Ninth Circuit: Reversal on Appeal of Order Denying Chapter 15 Recognition Does Not Retroactively Trigger Automatic Stay
It is generally recognized that an order of a U.S. bankruptcy court recognizing a debtor's foreign bankruptcy proceeding 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. A related question—whether the stay applies retroactively to the chapter 15 petition date after a bankruptcy court order denying chapter 15 recognition is reversed on appeal—was the subject of a ruling handed down as an apparent matter of first impression by the U.S. Court of Appeals for the Ninth Circuit. In International Petroleum Products & Additives Co. v. Black Gold SARL, 115 F.4th 1202 (9th Cir. 2024), the Ninth Circuit ruled that the automatic stay does not apply retroactively under those circumstances.
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.
After the U.S. Supreme Court in Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696 (2020) ("RCA"), circumscribed the use of nunc pro tunc ("now for then") orders that make relief ordered by a court apply retroactively to an earlier point in time, the continued use of such orders in bankruptcy cases became an open question. Prior to RCA, bankruptcy courts often granted certain relief nunc pro tunc, such as retroactive orders approving the retention of professionals, authorizing the rejection of executory contracts or unexpired leases, or granting relief from the automatic stay.
This practice has been reexamined since the RCA ruling, but with mixed results. Compare Merriman v. Fattorini (In re Merriman), 616 B.R. 381 (B.A.P. 9th Cir. 2020) ("We do not believe that the ruling in [RCA] prohibits a bankruptcy court's exercise of the power to grant retroactive relief from stay."), appeal dismissed, 2021 WL 3610895 (9th Cir. Feb. 26, 2021); In re Okorie, 2024 WL 559083, at **5–7 (Bankr. S.D. Miss. Feb. 12, 2024) (noting that in Sikes v. Global Marine, Inc., 881 F.2d 176, 178–79 (5th Cir. 1989), "[t]he Fifth Circuit has recognized the inherent power of the bankruptcy court to retroactively annul the automatic stay under the authority granted in § 362(d)," and concluding that RCA was inapposite because the "Bankruptcy Code expressly authorizes annulment as one form of relief from the stay"), with In re Plasterer, 2024 WL 606264, at *4 (Bankr. E.D.N.Y. Feb. 13, 2024) (holding that the court cannot retroactively impose the automatic stay to "undo" a foreclosure sale that has already occurred and that the court cannot use its equitable powers to impose the stay retroactively); In re Telles, 2020 WL 2121254, at *5 (Bankr. E.D.N.Y. Apr. 30, 2020) (citing RCA in denying a motion for a nunc pro tunc order vacating the automatic stay prior to a state court-authorized foreclosure sale because "there was never a determination by this Court vacating the stay prior to the foreclosure sale," and noting that "a nunc pro tunc order cannot bless a state court authorized foreclosure sale where the automatic stay has deprived the state court of such jurisdiction").
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].
The Automatic Stay in Chapter 15 Cases
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); 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).
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."
Black Gold
Black Gold S.A.R.L. ("BG") is a Monaco limited liability company that until June 2020 operated as a distributor of lubricant products in Europe, Africa, and Asia. BG's sole shareholders are Lorenzo and Sofia Napoleoni (the "Napoleonis").
BG's largest customer and creditor was International Petroleum Products and Additives Company, Inc. ("IPAC"), a California-based petroleum additive manufacturer. In 2016, BG agreed to be IPAC's European sales representative. The parties' agreement obligated BG to maintain the confidentiality of IPAC's commercial information and prohibited BG from providing service or assistance for competing products.
However, the Napoleonis and a former IPAC employee established a competing additives business ("PXL") that appropriated IPAC's trade secrets and customer list.
IPAC commenced an arbitration proceeding against BG in California to remedy BG's appropriation of IPAC's commercial information and breach of their sales agreements. In 2019, the arbitrator awarded IPAC more than $1 million, finding that BG stole IPAC' s trade secrets to manufacture and sell PXL products. A California district court later entered a judgment confirming the award, and discovery ensued to assist IPAC in collecting on its judgment.
IPAC unsuccessfully attempted to collect the debt in the United States and Monaco, including seeking a judgment debtor examination of the Napoleonis. Collection and enforcement efforts were suspended in May 2020 when BG filed an insolvency proceeding in Monaco (the "Monaco Proceeding"). The Monégasque court fixed May 29, 2019, as the date of BG's "cessation of payments" (or insolvency date) and appointed Jean-Paul Samba ("Samba" or the "trustee") as BG's trustee.
In November 2020, Samba filed a petition in the U.S. Bankruptcy Court for the Northern District of California seeking chapter 15 recognition of the Monaco Proceeding. At that time, the Monégasque court had not yet determined in accordance with the Monégasque Commercial Code whether the Monaco Proceeding would proceed as a reorganization or a liquidation, but the latter appeared likely as BG had ceased operating.
Pending its decision on the chapter 15 petition, the bankruptcy court provisionally stayed all litigation against BG, including the California district court action, under section 1519 of the Bankruptcy Code.
IPAC opposed recognition, arguing that it would be manifestly contrary to U.S. public policy because BG's insiders were acting in bad faith to exploit the bankruptcy systems in both the United States and Monaco. According to IPAC, the "true purpose" of the bankruptcy cases was to allow the Napoleonis to "escape liability for their international torts." IPAC also contended that the differences between the bankruptcy laws of Monaco and the United States were so great that the U.S. bankruptcy court should refuse to recognize the Monaco Proceeding.
On March 15, 2021, the bankruptcy court denied the petition for recognition. See In re Black Gold S.A.R.L., No. 20-bk-41815, ECF No. 72 (Bankr. N.D. Cal. Mar. 15, 2021). Among other reasons: (i) the court was skeptical about the timing of Monégasque court's designation of the "cessation of payments" date as the same day that IPAC's California arbitration award became final; and (ii) despite Samba's extreme lack of candor, the court discovered that the Napoleonis were paying Samba's attorney's fees, and his lawyers also represented BG in the California litigation and the Napoleonis in a separate lawsuit filed in Ohio. The bankruptcy court found that Samba was not acting as a true fiduciary, and that the chapter 15 case was essentially a two-party dispute pitting BG and the Napoleonis against IPAC, rather than a vehicle for any meaningful recovery for creditors.
The bankruptcy court ruled that the chapter 15 petition was not a legitimate use of chapter 15 for the purposes and objectives stated in section 1501 of the Bankruptcy Code. Instead, the court reasoned, the filing was an effort to preclude IPAC from recovering on its judgment and to protect the Napoleonis and PLX from the consequences of their wrongful conduct. It accordingly denied recognition of the Monaco Proceeding without making any findings under section 1517. Samba appealed the ruling to a Ninth Circuit bankruptcy appellate panel (the "BAP").
Because neither BG nor the Napoleonis sought a stay pending the appeal of the bankruptcy court's order denying chapter 15 recognition, the bankruptcy court lifted its provisional stay of the California district court litigation. IPAC added the Napoleonis as defendants under a theory of alter-ego liability, but both BG and the Napoleonis steadfastly opposed IPAC's efforts to obtain information via discovery concerning BG's assets and the connections between BG and the Napoleonis. For their discovery misconduct, the district court later sanctioned the defendants, including an inference that the Napoleonis were BG's alter ego under both U.S. and Monégasque law. The district court later amended its final judgment to add the Napoleonis as judgment debtors. BG and the Napoleonis appealed that ruling to the Ninth Circuit.
On February 27, 2022, the BAP reversed the bankruptcy court's order denying chapter 15 recognition of the Monaco Proceeding, concluding that the bankruptcy court erred by relying on section 1501 to deny chapter 15 recognition. Instead, the BAP held that recognition is governed by sections 1515 through 1524, which specifically details the requirements for recognition. See In re Black Gold S.A.R.L., 635 B.R. 517 (B.A.P. 9th Cir. 2022). According to the BAP, if those requirements are satisfied—which was the case here—"recognition is mandatory … and there is no public policy basis to deny it." Id. at 526 (citations omitted).
The court also noted that, "standing alone," bad faith is not a proper basis to invoke the section 1506 public policy exception to deny recognition. Moreover, it explained, "the conduct here, while objectionable, did not rise to the level of a violation of U.S. public policy, and certainly not 'manifestly' so." Id. at 531. Although the Monaco Proceeding and BG's chapter 15 petition were clearly designed to thwart IPAC's collection efforts, the BAP wrote, "Bankruptcies are filed in the United States under other chapters for the same purpose, but the petition may still be filed." Id. However, instead of remanding the case to the bankruptcy court, the BAP itself recognized BG's Monaco Proceeding under chapter 15, thereby triggering the automatic stay.
Pending its ruling on the appeal of the California district court's ruling, the Ninth Circuit stayed the appeal with respect to BG, but not the Napoleonis, because they were not debtors in the Monaco Proceeding. It later denied the Napoleonis' request to remand the case to the California district court so that it could reconsider its final judgment in light of the BAP recognition ruling. According to the Napoleonis: (i) IPAC's alter-ego claim against them was subject to the automatic stay triggered by chapter 15 recognition because the claim was property of BG's bankruptcy estate that could be asserted only by the trustee; and (ii) the California district court's final judgment was therefore void to the extent it granted IPAC any relief against the Napoleonis on an alter-ego theory. Although it denied the remand motion, the Ninth Circuit permitted the Napoleonis to renew the motion before the California district court in a procedurally proper manner.
Instead, the Napoleonis raised the same arguments in opposing IPAC's motion in the district court seeking an award of attorneys' fees. The district court rejected their arguments, and awarded IPAC approximately $146,000 in fees. The Napoleonis appealed that award to the Ninth Circuit.
The Ninth Circuit's Ruling
A three-judge panel of the Ninth Circuit affirmed the district court's decision.
Writing for the panel, U.S. Circuit Judge Carlos Bea rejected the Napoleonis' argument that the automatic stay should have taken effect on March 15, 2021, when the bankruptcy court denied the trustee's petition for recognition of the Monaco Proceeding, because the BAP later reversed the order on appeal. According to Judge Bea, the Napoleonis failed to cite any court ruling in the Ninth Circuit in which a court has given retroactive effect to an order reversing a bankruptcy court order under similar circumstances.
Judge Bea observed that whether the reversal on appeal of an order denying chapter 15 recognition retroactively triggers the automatic stay under section 1520 of the Bankruptcy Code was a matter of first impression. However, he explained, "the answer is as straightforward as the question is novel." Black Gold, 115 F.4th at 1212.
According to the Ninth Circuit panel, had Congress intended "recognition" of a foreign proceeding under section 1520 (and the triggering of the automatic stay) to include entry of a later-reversed order denying recognition, it could easily have drafted the provision that way, yet it did not.
The panel rejected the Napoleonis' contention that the court should deploy its equitable powers to skirt the unambiguous language of section 1520 because they would be punished due to the bankruptcy court's reversible error in denying recognition. This argument, Judge Bea explained, was foreclosed because the Napoleonis failed to seek a stay pending appeal of the bankruptcy court's order denying chapter 15 recognition of the Monaco Proceeding, which they could have done even though they were not then parties to the chapter 15 case, by moving to intervene in the case under Rule 2018 (a) of the Federal Rules of Bankruptcy Procedure. Id. at 1213–14.
The Ninth Circuit also rejected the Napoleonis' argument that continued litigation of IPAC's alter-ego claim against them should be prevented by the automatic stay because the claim was the "'property' of [BG's] bankruptcy estate that only [BG's] trustee may assert," or alternatively, that this case provides "the 'perfect opportunity' for us to recognize, as an exception to the general rule, that a non-debtor is the 'debtor' for the purposes of the automatic stay under Chapter 15 if he is found to be the alter ego of the foreign bankrupt company." Id. at 1211–12.
Judge Bea explained that applicable non-bankruptcy law determines whether a claim belongs to a bankruptcy trustee or a creditor. In this case, he noted, because the Napoleonis failed to give appropriate notice to the district court that the alter-ego claim belonged to BG's trustee under Monégasque law, they forfeited that argument before the Ninth Circuit. Therefore, the Ninth Circuit panel concluded that California law applied. According to Judge Bea, there is "no such thing" as a general alter-ego claim under California law, and, given IPAC's allegations that it, rather than BG, was harmed by the Napoleonis' misconduct, the "purely procedural" alter-ego claim seeking to hold the Napoleonis liable for BG's wrongdoing belonged to IPAC, not the trustee. Id. at 1216.
Finally, the Ninth Circuit panel concluded that, even if the automatic stay could apply retroactively, it would not have precluded litigation against the Napoleonis because they were not debtors in the Monaco Proceeding, and it was not appropriate in this case to apply the "unusual situation" exception sometimes relied on by the courts to extend the scope of the stay to non-debtors. Id. at 1217.
Outlook
The facts of Black Gold are both complicated and procedurally awkward, and the Ninth Circuit's ruling was made more difficult by the appellants' failure to raise arguments or take other appropriate actions at the proper times throughout the course of the litigation in the bankruptcy and district courts. However, there are a few key takeaways from the decision.
- First, the automatic stay triggered by recognition of a foreign bankruptcy proceeding under chapter 15 does not apply retroactively if a bankruptcy order denying recognition is later reversed on appeal.
- Second, even if the automatic stay did apply retroactively to the date that a bankruptcy court wrongfully denied chapter 15 recognition, the stay would apply only to the debtor and its U.S. property, unless unusual circumstances existed to warrant extension of the stay to non-debtor third parties.
- Third, unlike in cases filed under other chapters of the Bankruptcy Code, the filing of a chapter 15 petition for recognition of a foreign bankruptcy case in the United States does not create an estate. Instead, the foreign debtor's "estate" is administered by the foreign court presiding over the debtor's bankruptcy case, and the U.S. bankruptcy court, following recognition of the foreign bankruptcy, has the power under chapter 15 to assist the foreign court and the debtor's foreign representative.
- Fourth, claims or causes of action that allege particular injury to a creditor, as distinguished from harm to all creditors or the debtor, may generally be asserted by the injured creditor, rather than a bankruptcy trustee, without an order of the bankruptcy court modifying the automatic stay.
- Finally, a litigant's failure to raise issues or defenses or to seek relief in a timely and procedurally proper manner may be fatal to its prospects of prevailing in an appeal.
