Ownership Dispute Regarding Foreign Debtor's U.S. Assets Must Be Resolved Before a U.S. Bankruptcy Court Can Approve Sale Under Section 363 in Chapter 15 Case

As the enactment of chapter 15 of the Bankruptcy Code approaches its 20-year anniversary, U.S. bankruptcy courts are still grappling with some unresolved issues concerning how its provisions should be applied to best harmonize cross-border bankruptcy cases. One of those issues was the subject of a bench ruling handed down by the U.S. Bankruptcy Court for the District of Delaware.

In In re Goli Nutrition Inc., 2024 WL 1748460 (Bankr. D. Del. Apr. 23, 2024), the bankruptcy court: (i) denied a foreign representative's motion under section 363(b) of the Bankruptcy Code to approve a "reverse vesting transaction" authorized by a Canadian bankruptcy court involving a transfer of the foreign debtor's stock to a successor entity because the transaction did not involve a use, sale, or lease of the debtor's property; and (ii) held in abeyance the foreign representative's companion motion to approve a non-ordinary course "free and clear" sale of certain equipment located in California pending resolution of a dispute over the ownership of the equipment. 

In so ruling, the U.S. bankruptcy court concluded that the propriety of a sale of a foreign debtor's U.S. assets in a chapter 15 case must be assessed according to the standard applied to such sales under section 363(b) of the Bankruptcy Code. The court also determined that the ownership dispute had to be resolved before it could approve the sale, but not necessarily by a U.S. bankruptcy court, and it was appropriate in this case to allow the Canadian court to determine the owner of the assets. 

Procedures, Recognition, and Relief Under Chapter 15

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 nearly 60 nations or territories.

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). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts. 

Chapter 15 replaced section 304 of the Bankruptcy Code. Section 304 allowed an accredited representative of a debtor in a foreign bankruptcy proceeding to commence a limited "ancillary" bankruptcy case in the United States for the purpose of enjoining actions against the foreign debtor or its assets located in the United States or, in some cases, repatriating such assets or their proceeds abroad for administration in the debtor's foreign bankruptcy.

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 assets, and the rehabilitation of financially troubled businesses.

Under section 1515, the "foreign representative" of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding."

Section 101(24) defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding." 

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code 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.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. §§ 1502(4) and 1517(b)(1))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. §§ 1502(5) and 1517(b)(2)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c). An establishment is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."

Section 1507(a) of the Bankruptcy Code provides that, upon recognition of a main or nonmain proceeding, the bankruptcy court may provide "additional assistance" to a foreign representative "under [the Bankruptcy Code] or under other laws of the United States." However, the court must consider whether any such assistance, "consistent with principles of comity," will reasonably ensure that: (i) all stakeholders are treated fairly; (ii) U.S. creditors are not prejudiced or inconvenienced by asserting their claims in the foreign proceeding; (iii) the debtor's assets are not preferentially or fraudulently transferred; (iv) proceeds of the debtor's assets are distributed substantially in accordance with the order prescribed by the Bankruptcy Code; and (v) if appropriate, an individual foreign debtor is given the opportunity for a fresh start. 

Upon recognition of a foreign "main" proceeding, section 1520(a) of the Bankruptcy Code provides that certain provisions of the Bankruptcy Code automatically come into force, including: (i) the automatic stay preventing creditor collection efforts "with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the
 United States" (section 362, subject to certain enumerated exceptions); (ii) the right of any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest (section 361); and (iii) restrictions on, and procedures governing, the use, sale, lease, transfer, or encumbrance of the debtor's U.S. assets (sections 363, 549, and 552).

Section 1520(a)(2) provides 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." In addition, section 1520(a)(3) gives a foreign representative in a recognized chapter 15 case the power, unless the court orders otherwise, to "exercise the rights and powers of a [bankruptcy] trustee under and to the extent provided by sections 363 and 552." 

Section 363(b) of the Bankruptcy Code provides that a bankruptcy trustee, after notice and a hearing, may use, sell, or lease property of the estate outside the ordinary course of the debtor's business. Most courts apply a "business judgment" standard to a proposed use, sale, or lease of property under section 363(b), whereby "the bankruptcy court reviews the business judgment of a trustee (or a chapter 11 debtor-in-possession ("DIP")) to determine independently whether the judgment is a reasonable one." Collier on Bankruptcy ("Collier") ¶ 363.02[4] (16th ed. 2024) (citing and discussing cases). Under section 363(f), the trustee or DIP may sell property pursuant to section 363(b) "free and clear of any interest in such property of an entity other than the estate" under certain specified circumstances, including when "such interest is in bona fide dispute." 11 U.S.C. § 363(f)(4).

Following recognition of a foreign main or nonmain proceeding, section 1521(a) provides that, to the extent not already in effect, and "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," the bankruptcy court may also "grant[] any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)." These provisions authorize a bankruptcy trustee to, among other things, avoid and recover transfers that are fraudulent under the Bankruptcy Code. 

However, these avoidance powers are only available to a foreign representative if a proceeding under another chapter of the Bankruptcy Code is commenced with respect to the debtor. See 11 U.S.C. §§ 1520(c) and 1528 (providing that a foreign representative can also commence a full-fledged bankruptcy case under any other chapter of the Bankruptcy Code as long as the foreign debtor is eligible to file for bankruptcy in the United States under that chapter).

Some Notable Court Rulings Regarding Chapter 15 Asset Sales

Asset sales under section 363(b) in chapter 15 cases have been the focus of some notable bankruptcy court rulings. For example, in In re Elpida Memory, Inc., 2012 WL 6090194 (Bankr. D. Del. Nov. 20, 2012), the U.S. Bankruptcy Court for the District of Delaware ruled as an apparent matter of first impression that both the express language of chapter 15 and its legislative intent permit the representative of a foreign debtor to use chapter 15 and section 363 to sell assets located in the United States free and clear of all claims, liens, and other competing interests. Id. at *1.

In Elpida, the Delaware bankruptcy court recognized a Japanese reorganization proceeding under chapter 15. The Japanese debtor's foreign representative filed motions seeking court approval under sections 1520 and 363 to sell certain of the debtor's U.S. assets free and clear of competing interests. The sale had previously been authorized by the Japanese court overseeing the debtor's reorganization proceeding. A group of the debtor's bondholders objected.

All parties agreed that section 363 was available as a means of effecting a sale of the debtor's U.S. assets. However, it was unclear how the provision should be applied and, in particular, what standard should be employed by the bankruptcy court in ruling on the request. Therefore, the court considered whether it should decide the issue on the basis of principles of comity (i.e., by deferring to the Japanese court's approval of the transaction) or instead independently review the sale transaction under the "business judgment" standard applied under section 363(b) to a proposed use, sale, or lease of property outside the ordinary course of business.

The bankruptcy court noted that section 1520(a) unequivocally states that section 363 applies to transfers of a foreign debtor's U.S. assets and ruled that the business judgment standard applied to section 363(b) sales must also apply in chapter 15 cases. Id. at *5.  

The court also examined the legislative history of section 1520, observing that the provision 

is adopted from Article 20 of the Model Law, which adopts an in rem division of labor between U.S. and foreign courts—i.e., by giving domestic courts responsibility for the assets located within their borders and by imposing "the laws of the ancillary forum—not those of the foreign main proceedings—on the debtor with respect to transfers of assets located in such ancillary jurisdiction." Id. at *7. The court was mindful of the important role that comity plays in chapter 15 cases but cautioned that "it is not the end all be all of the statute. "To require this Court to defer in all instances to foreign court decision[s]," the court wrote, "would gut section 1520," which itself is mandatory. Id. at *8.

By contrast, in In re Fairfield Sentry Ltd., 484 B.R. 615 (Bankr. S.D.N.Y. 2013), aff'd, 2013 BL 370732 (S.D.N.Y. July 3, 2013), vacated and remanded, 768 F.3d 239 (2d Cir. 2014), on remand, 539 B.R. 658 (Bankr. S.D.N.Y. 2015), aff'd, No. 15 Civ. 9474 (AKH) (S.D.N.Y. June 2, 2016), aff'd, 690 F. App'x 691 (2d Cir. 2017), the U.S. Bankruptcy Court for the Southern District of New York held that a chapter 15 debtor's sale of claims asserted by a British Virgin Island ("BVI") "feeder fund" against Bernard Madoff's defunct brokerage company was not subject to independent review as an asset sale under section 363(b) of the Bankruptcy Code. After the debtor's foreign representative agreed to sell the claims, subject to approval by both the BVI court overseeing the debtor's liquidation and the New York bankruptcy court that granted chapter 15 recognition of the BVI liquidation, the claims increased substantially in value. This prompted the foreign representative to attempt to scuttle the sale (which had been approved by the BVI court), by filing a motion in the New York bankruptcy court to disapprove it under sections 363(b) and 1520(a)(2) as not being in the best interests of the debtor or an exercise of sound business judgment.

The bankruptcy court denied the motion, noting that "[t]his is a pure and simple case of seller's remorse." Fairfield Sentry, 484 B.R. at 617. The court also concluded that plenary review of the claims sale was not warranted under section 1520(a)(2) (and section 363) because the property was not "within the territorial jurisdiction" of the United States. The court determined that the debtor's claims were "located" in the BVI and that, as a matter of comity, the BVI court had the paramount interest in the sale of the claims, whereas the New York bankruptcy court lacked any meaningful interest at all.  

After a district court affirmed the ruling on appeal, the U.S. Court of Appeals Second Circuit vacated the orders below and remanded the case to the bankruptcy court, ruling that the claims, which could be attached under New York law, were located in the United States by operation of section 1502(8) of the Bankruptcy Code (providing that property located in the United States includes "any property subject to attachment or garnishment that may be properly seized or garnished by an action" in a U.S. court), and pursuant to section 1520(a)(2), the bankruptcy court must apply section 363 to the sale.  

In so ruling, the Second Circuit concluded that the bankruptcy court erred in using principles of comity to defer to the BVI court's approval of the transfer of the claims. According to the Second Circuit, "[T]he language of section 1520(a)(2) is plain; the bankruptcy court is required to conduct a section 363 review when the debtor seeks a transfer of an interest in property within the territorial jurisdiction of the United States." Fairfield Sentry, 768 F.3d at 246. According to the Second Circuit, although comity is a "central[]" component of chapter 15, section 1520(a)(2)'s requirement for section 363(b) review operates as a "brake or limitation on comity." Id. at 246 n.1.

Upon remand, the bankruptcy court ruled that the foreign representative demonstrated a sound business reason for abandoning the sale and should be permitted either to retain the claims and receive recoveries for the debtor's creditors or to sell the claims at a much higher price. The Second Circuit ultimately affirmed that decision in a summary order.

In Crystallex Int'l Corp., 2022 WL 17254660 (Bankr. D. Del. Nov. 28, 2022), the foreign representative of a Canadian company in a reorganization proceeding in Canada sought an order from the U.S. Bankruptcy Court for the District of Delaware enforcing under chapter 15 a mechanism approved by the Canadian court that included a sale of certain stock in a U.S. company attached to satisfy an arbitration award. Relying on Elpida and Fairfield Sentry, the bankruptcy court held that, pursuant to section 1520 of the Bankruptcy Code, the court presiding over a chapter 15 case has in rem jurisdiction over the foreign debtor's U.S. assets and that the U.S. bankruptcy court, rather than the foreign court, must decide whether a request to sell such assets should be approved under section 363(b). As in Fairfield Sentry, the court in Crystallex concluded that the stock was located in the United States pursuant to section 1502(8) of the Bankruptcy Code because it was subject to garnishment or attachment by an action in a U.S. court.

Many other bankruptcy courts have also approved the use, sale, or lease of a foreign debtor's U.S. assets under section 363(b) in a chapter 15 case, albeit most in unpublished orders or opinions. See, e.g., In re Markus, No. 19-10096 (MG) (Bankr. S.D.N.Y. Apr. 27, 2022) (Doc. No. 421) (approving the sale of a foreign debtor's U.S. condominium and a related settlement); In re CDS U.S. Holdings, Inc., No. 20-11719 (CSS) (Bankr. D. Del. Oct. 29, 2020) (Doc. No. 112) (applying the business judgment standard in approving a sale of substantially all of a foreign debtor's U.S. assets free and clear of liens); In re Veris Gold Corp., Nos. 14-51015-gwc et al. (Bankr. D. Nev. June 4, 2015) (Doc. No. 318) (order recognizing and enforcing a Canadian court's order approving a sale of the debtor's assets and related relief, and approving the sale free and clear of liens applying the business judgment standard under section 363(b)); In re Irish Bank Resol. Corp. Ltd., 2014 WL 1759609, at *2 (Bankr. D. Del. Feb. 14, 2014) (approving a free and clear sale of a foreign debtor's assets and related assignments under section 363(b)'s business judgment standard); see also In re Ace Track Co., Ltd., 556 B.R. 887, 913 (Bankr. N.D. Ill. 2016) (section 1520 authorizes a foreign representative to operate the debtor's business within the United States and to dispose of its U.S. assets under section 363, but it does give such authority to the foreign debtor).

Goli Nutrition

Quebec-based nutritional gummi producer Goli Nutrition Inc. ("Goli Canada") is a Canadian corporation with various affiliates, including a U.S. subsidiary incorporated in Delaware ("Goli US," and together with Goli Canada, the "debtors")). On March 18, 2024, both companies obtained protection in a proceeding under the Canadian Companies' Creditors Arrangement Act (the "CCAA").

Shortly afterward, a foreign representative appointed for the debtors by a Canadian court filed a motion in the U.S. Bankruptcy Court for the District of Delaware for recognition of the CCAA proceeding under chapter 15 as a foreign main proceeding. The foreign representative also sought an order pursuant to section 1529, 363(b), and 363(f) of the Bankruptcy Code recognizing and enforcing orders issued by the Canadian court approving two transactions: (i) a "reverse vesting transaction" involving a sale of Goli Canada stock and the creation of a new entity to hold Goli Canada's remaining assets, including certain equipment located in California; and (ii) a related sale of the equipment (the "equipment sale"). In approving the equipment sale, the Canadian court directed that part of the proceeds of the sale should be set aside pending the resolution of a dispute over ownership of the equipment with a creditor ("Hoffman") that had commenced litigation in the United States against the debtors' officers and directors and certain non-debtor affiliates. The Canadian court scheduled a hearing to settle the ownership dispute.

Hoffman objected to chapter 15 recognition to the extent that it would stay the litigation. After that objection was resolved, the recognition petition was unopposed. However, Hoffman objected to the equipment sale based on its competing ownership claim. 

The Bankruptcy Court's Ruling

In a bench ruling, the bankruptcy court granted the petition for chapter 15 recognition of the CCAA proceeding as a foreign main proceeding. Explaining that CCAA proceedings are consistently recognized by U.S. bankruptcy courts under chapter 15, U.S. Bankruptcy Judge Laurie Selber Silverstein saw no reason not to do so in this case, particularly in the absence of any opposition to recognition. She did note that, although no one challenged designation of the CCAA proceeding as a "foreign main proceeding," Goli US is a Delaware, rather than a Canadian, corporation. Even so, Judge Silverstein wrote, "I do not perceive a difference in how I would rule on the [sale] motions before me if recognition were as a foreign non-main proceeding." Goli Nutrition, 2024 WL 1748460, at *2.

Judge Silverstein refused to approve the reverse vesting transaction under section 363. First, she explained, the issuance of stock in a debtor company is not a sale transaction under section 363. Second, the court noted, even if it were, the new stock—in a Canadian company—was not an asset of the debtor in the territorial jurisdiction of the United States, meaning that section 1520(a)(2) did not apply. However, she reasoned, to the extent that a transfer of the equipment to the new Canadian entity was part of the reverse vesting transaction, bankruptcy court approval of this non-ordinary course "use" of Goli Canada's U.S. property—which Judge Silverstein analogized to a "quitclaim deed"—was required under section 363. Id. at *3. 

Examining her previous decision in Crystallex as well as the ruling in Fairfield Sentry, Judge Silverstein concluded that: (i) a bankruptcy court is obligated to apply section 363 to a proposed sale of a foreign debtor's U.S. assets in a chapter 15 case; and (ii) "Comity does not require me to defer to the Canadian Court on approval." Id. at *5.

The bankruptcy court found that the proposed equipment sale readily satisfied the standard for approval of a non-ordinary course asset sale under section 363(b). However, Judge Silverstein was uncertain whether the ownership dispute had to be decided before approval of the sale under section 363, and if so, by which court.

Judge Silverstein concluded that the ownership dispute had to be resolved before she could authorize the equipment sale. She rejected the foreign representative's argument that the transaction could be approved, with the proviso that Hoffman would be entitled to whatever portion of the proceeds related to its property upon adjudication of the ownership dispute. According to Judge Silverstein, there is nothing in section 363 "that permits me to authorize the sale of property that is not property of the estate—in other words that the debtor has no interest in at all." Id. (citing and discussing Worcester Country Club Acres, LLC, 655 B.R. 41 (Bankr. D. Mass. 2023)).

The bankruptcy court also held that section 363(f) of the Bankruptcy Code "does not provide independent authority for a trustee to sell assets." Instead, Judge Silverstein explained, section 363(f) authorizes a free and clear sale of property that can be sold under sections 363(b) or section 363(c). She wrote that, accordingly, "in order to invoke the 'free and clear' sale, the trustee must first own the property … [and] [d]isputes envisioned by section 363(f)(4) [authorizing a free and clear sale when "such interest is in bona fide dispute"] therefore, are not ownership disputes." Id. at *6 (citing Worcester, 655 B.R. at 46). 

"With one exception," the bankruptcy court concluded that the ownership dispute had to be resolved before it could authorize the equipment sale. That exception, Judge Silverstein noted, would apply if the debtor were selling its disputed interest in the property:

If a purchaser is willing to buy whatever interest the debtor has in property—in essence, take a quitclaim deed—that could be permissible. The dispute would survive the sale, to be fought now by the purchaser, not the debtor.

Id. However, in this case, the foreign representative did not seek approval of such a sale.

Finally, after examining relevant decisions (some of which dealt with free and clear sales under repealed section 304 of the Bankruptcy Code), the bankruptcy court concluded that "no clear guidance is given on which court must decide the ownership issue." Id. at *7 (discussing JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. DE C.V., 412 F.3d 418 (2d Cir. 2005); In re Koreag, Controle et Revision, S.A. v. Refco F/X Assocs., Inc., 961 F.2d 341 (2d Cir. 1992); CT Inv. Mgmt. Co. LLC v. Cozumel Caribe, S.A. de C.V. (In re Cozumel Caribe, S.A. de C.V.), 482 B.R. 96 (Bankr. S.D.N.Y. 2012)). In this case, however, Judge Silverstein concluded that the Canadian court, which had already scheduled a hearing on the ownership dispute, was in the best position to decide it. She accordingly held the foreign representative's equipment sale motion in abeyance to give the Canadian court an opportunity to do so.

Outlook

Nearly two decades after chapter 15 implemented the Model Law in the United States, section 363 asset sales of a foreign debtor's U.S. assets are increasingly common in chapter 15 cases. Goli Nutrition is emblematic of some important issues faced by U.S. bankruptcy courts in assessing the propriety of such sales. Key takeaways from the ruling include:

• Consistent with previous court decisions addressing the question and the plain language of section 1520(a)(2) of the Bankruptcy Code, a U.S. bankruptcy court must independently examine a proposed sale of a chapter 15 debtor's assets pursuant to the standard applied to such sales under section 363 of the Bankruptcy Code, rather than deferring as a matter of comity to a foreign court order approving the sale.
• Disputes regarding the ownership of property to be sold under section 363 must be resolved before a U.S. bankruptcy court can approve the sale, but the U.S. bankruptcy court need not necessarily adjudicate the dispute.
• Section 363 transactions in a chapter 15 case must involve a use, sale, or lease of the foreign debtor's property (as distinguished from "property of the estate," as there is no estate in a chapter 15 case).
• Section 363(f) of the Bankruptcy Code does not provide independent authority for a use, sale, or lease of property. Rather, the sale must be authorized under sections 363(b) or 363(c).

Interestingly, the bankruptcy court's statement in dicta that there would be no difference in how it would rule on the motions if the CCAA proceeding had been recognized as a foreign non-main proceeding does not explain that section 1520(a) makes section 363 applicable in a chapter 15 case "[u]pon recognition of a foreign main bankruptcy proceeding." A bankruptcy court could conceivably exercise its power under section 1521(7) or section 1507(a) to make section 363 applicable after recognizing a foreign non-main proceeding, but the analysis might be more nuanced.

On April 30, 2024, the Canadian court entered an order terminating the debtors' CCAA proceeding at the debtors' request after they were unable to obtain financing to proceed with their restructuring and the equipment sale. On June 12, 2024, the U.S. bankruptcy court entered an order recognizing the termination order and closing the debtors' chapter 15 case.

Read the full Business Restructuring Review here.