Chapter 15 Gap Period Relief Subject to Preliminary Injunction Standard but No Adversary Proceeding Required

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 automatically trigger a stay of actions against a debtor or its U.S. assets. Instead, the automatic 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.

This can be problematic if creditor collection efforts continue during the "gap" period between the filing of the chapter 15 petition and the entry of a recognition order. However, section 1519 of the Bankruptcy Code authorizes bankruptcy courts to grant provisional relief―including extension of the automatic stay to protect the foreign debtor's U.S. assets―during the gap period "where relief is urgently needed to protect the assets of the debtor or the interests of the creditors."

Courts disagree as to the standard that should govern the issuance of such relief during the gap period and whether an adversary proceeding is required to obtain it. The U.S. Bankruptcy Court for the Southern District of New York recently weighed in on this issue. In In re Beechwood Re, 2019 WL 3025283 (Bankr. S.D.N.Y. July 10, 2019), the court ruled that "the standards for issuance of a preliminary injunction" apply to determine whether provisional relief should be granted under section 1509(a). The court also held that such relief need not necessarily be sought in an adversary proceeding.

Procedures and Relief Under Chapter 15

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code 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. Section 1517(b) of the Bankruptcy Code accordingly provides that a "foreign proceeding shall be recognized . . . as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; or . . . as a foreign nonmain proceeding if the debtor has an establishment . . . in the foreign country where the proceeding is pending" (emphasis added). See also 11 U.S.C. §§ 1502(4) and 1502(5) (defining "foreign main proceeding" and "foreign nonmain proceeding," respectively).

If a U.S. court recognizes a foreign main proceeding under chapter 15, section 1520(a)(1) of the Bankruptcy Code provides that actions against the foreign debtor or its property located in the U.S. are stayed under section 362―the Bankruptcy Code's "automatic stay." Following recognition of a foreign main or nonmain proceeding, a bankruptcy court is authorized under section 1521 to grant, among other things, injunctive relief staying actions or execution against the debtor's U.S. assets, the authority to distribute the proceeds of the debtor's U.S. assets and, with certain exceptions, any additional relief available to a bankruptcy trustee "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors." Section 1521(e) provides that "[t]he standards, procedures, and limitations applicable to an injunction shall apply to" requests for injunctive relief authorized by sections 1521(a)(1) and (2), to suspend the right to transfer the debtor's assets (section 1520(a)(3)), and for any extension of provisional relief previously granted during the gap period (section 1521(a)(6)).

During the gap period, section 1519(a) of the Bankruptcy Code authorizes a bankruptcy court to grant provisional injunctive relief and certain other forms of relief where "relief is urgently needed to protect the assets of the debtor or the interests of the creditors." In addition to an order staying execution against the debtor's U.S. assets, such relief can include an order that entrusts the administration of U.S. assets to the foreign representative (section 1519(a)(2)), provides for the examination of witnesses and the taking of evidence regarding the debtor's affairs (sections 1519(a)(3) and 1521(a)(4)), or grants additional relief (other than avoidance of transfers) available to a bankruptcy trustee (sections 1519(a)(3) and 1521(a)(7)).

Similar to section 1521(e), section 1519(e) provides that "[t]he standards, procedures, and limitations applicable to an injunction shall apply to relief under this section." Such relief terminates upon the court's ruling on the petition for recognition, although it may be extended in the court's discretion under section 1521(a)(6).

Standard Applicable to Injunctive Relief

Rule 7001(7) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") provides that "a proceeding to obtain an injunction or other equitable relief, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for the relief," is an "adversary proceeding" governed by the rules of Part VII of the Bankruptcy Rules, including the requirements in Bankruptcy Rules 7003 and 7004 that the proceeding be commenced by the filing and service of a summons and complaint. Thus, most courts require that a request for an injunction must be made in an adversary proceeding. See, e.g., In re Residential Capital, LLC, 480 B.R. 529, 538 (Bankr. S.D.N.Y. 2012) ("Where an injunction is sought by a debtor under section 105 to stay actions against non-debtors, the relief must be sought through an adversary proceeding under Fed. R. Bankr. P. 7001."); In re Viney, 369 B.R. 392, 393 (Bankr. N.D. Ind. 2007) ("The order denying the trustee's initial motion noted that the relief sought was in the nature of injunctive, equitable or declaratory relief, thereby requiring an adversary proceeding.").

However, many courts have ruled to the contrary in chapter 15 cases in connection with requests for provisional relief during the gap period. See In re Ace Track Co., Ltd., 556 B.R. 887, 894 n.6 (Bankr. N.D. Ill. 2016) (noting that the protections of section 362, while injunctive in nature, are not the same as an injunction and that an adversary proceeding is unnecessary to trigger the protections of the automatic stay); In re Worldwide Educ. Services, Inc., 494 B.R. 494, 499 n.1 (Bankr. C.D. Cal. 2013) ("[T]he court agrees . . . that an adversary proceeding is not required to obtain provisional relief under section 1519 of the Bankruptcy Code."; In re Pro-Fit Int'l, Ltd., 391 B.R. 850, 855 (Bankr. C.D. Cal. 2008) (same); In re Ho Seok Lee, 348 B.R. 799 (Bankr. W.D. Wash. 2006) (same); see also In re SIVEC SRL., 2011 WL 2445754 (Bankr. E.D. Okla. June 15, 2011) (extending the automatic stay under sections 105(a) and 1519 without an adversary proceeding).

Bankruptcy Rule 7065 provides that Rule 65 of the Federal Rules of Civil Procedure applies in adversary proceedings, except that a debtor, chapter 11 debtor-in-possession, or trustee may apply for a temporary restraining order or preliminary injunction without posting security. Rule 65 sets forth the procedures governing a request for an injunction or restraining order. Bankruptcy courts also sometimes grant injunctive relief under section 105(a) of the Bankruptcy Code, which provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." See In re GMI Grp., Inc., 598 B.R. 685 (Bankr. N.D. Ga. 2019) (exercising power under section 105(a) to enjoin creditors from pursuing litigation against guarantor of chapter 11 debtor's obligations).

Before granting a preliminary injunction under Rule 65, Bankruptcy Rule 7065, or section 105, most courts require the party seeking the provisional relief to demonstrate: (i) a reasonable likelihood of success on the merits; (ii) a likelihood of irreparable harm in the absence of relief; (iii) that the balance of hardships tips in the applicant's favor; and (iv) that the public interest would not be disserved if injunctive relief were granted. See, e.g., Broadstripe, LLC v. Natl. Cable Television Coop., Inc. (In re Broadstripe, LLC), 402 B.R. 646 (Bankr. D. Del. 2009); Lyondell Chem. Co. v. CenterPoint Energy Gas Servs. Inc. (In re Lyondell Chem. Co.), 402 B.R. 571 (Bankr. S.D.N.Y. 2009); see also In re Vitro, S.A.B. de C.V., 455 B.R. 571, 579 (Bankr. N.D. Tex. 2011) (applying the traditional preliminary injunction standard to a request for injunctive relief under sections 105 and 1519 during the gap period); In re Innua Canada Ltd., 2009 WL 1025088 (Bankr. D.N.J. Mar. 25, 2009) (same).

Disagreement in the Courts

Courts have disagreed regarding the standard that should apply to a request by a foreign representative for the temporary imposition of the automatic stay during the chapter 15 gap period.

For example, in Pro-Fit, the foreign representatives of affiliated debtors whose insolvency proceedings were pending in the U.K. sought an order applying the automatic stay during the gap period to stay execution by a judgment creditor against the debtors' U.S. assets.

A creditor objected to the request, contending that the foreign representatives' motion for provisional relief failed to comply with the "standards, procedures, and limitations applicable to an injunction," as mandated by section 1519(e). The Pro-Fit court rejected the creditor's reading of section 1519(e), finding it to be inconsistent with bankruptcy jurisprudence generally and the legislative history of the provision:

[S]uch a reading would impose procedural barriers that are unknown in the bankruptcy law to the availability of at least some § 1519 remedies. For example, § 1519(a)(3) authorizes "any relief referred to in paragraph (3), (4), or (7) of section 1521(a)." This relief includes the "examination of witnesses pursuant to Rule 2004 and the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities" (§ 1521(a)(4)). It is implausible to require an adversary proceeding for such actions in a chapter 15 case, where no adversary proceeding is required for such activity in a case under any other bankruptcy code chapter.

Pro-Fit, 391 B.R. at 860. The court also explained that the legislative history of section 1519(e) states that "[s]ubsection (e) makes clear that this section contemplates injunctive relief and that such relief is subject to specific rules and a body of jurisprudence." According to the court, this history suggests that "the rules and jurisprudence for an injunction apply . . . only where a foreign representative seeks an injunction under § 1519, and not where the relief sought is not an injunction."

The court in Pro-Fit ruled that the requested relief fell "outside of § 1519(e), because it is not an injunction or temporary restraining order," but was instead a request for "application of § 362 on a provisional basis, which does not require an adversary proceeding."

The court in Worldwide rejected that approach as being "flatly inconsistent with the plain and unambiguous language of section 1519(e)," which, as noted, provides that "[t]he standards, procedures, and limitations applicable to an injunction shall apply to relief under this section."

In Worldwide, the liquidator of a British Virgin Islands ("BVI") company filed a chapter 15 petition in a California bankruptcy court seeking recognition of the company's BVI liquidation. The liquidator later filed a motion with the bankruptcy court seeking the implementation of a provisional stay under sections 105, 362, and 1519 of all U.S. litigation against the debtor pending a ruling on the recognition petition.

The Worldwide court concluded that "the standard of proof for preliminary injunctive relief should apply here" and denied the motion because the liquidator failed to satisfy that standard. The court rejected the Pro-Fit court's conclusion that section 1519(e) is limited to motions that request injunctive relief (as distinguished from a motion seeking an extension of the automatic stay or any other form of relief delineated in the provision). The Worldwide court wrote that "the express language of the statute does not contain such a limitation and generally applies to all relief sought pursuant to Section 1519, including imposition of the automatic stay." Moreover, the court explained, the Pro-Fit court did not articulate "a significant reason why purportedly non-injunctive relief would have been treated differently than the express standard set out in Section 1519(e)." As an aside, the Worldwide court flagged that a different analysis may apply if a creditor is attempting in rem enforcement against property of the debtor's estate. 

The Worldwide bankruptcy court did agree with one aspect of the court's ruling in Pro-Fit—namely, that an adversary proceeding is not required to obtain provisional relief under section 1519. The court acknowledged that a request for an injunction is normally designated an adversary proceeding under Bankruptcy Rule 7001. However, the court wrote that "a request for provisional relief under Section 1519 is ancillary to a petition for recognition of a foreign proceeding under Section 1515, which does not apparently require an adversary proceeding." As such, the court reasoned, a petition for recognition and any related requests for provisional relief under section 1519 should be treated as "contested matters" under Bankruptcy Rule 9014.

Beechwood

Cayman Islands-domiciled reinsurance company Beechwood Re (the "debtor") was the subject of a winding-up proceeding in the Cayman Islands. The debtor was also a defendant in litigation pending before the U.S. District Court for the Southern District of New York involving allegations that Beechwood engaged in the unauthorized sale of reinsurance in the U.S. The plaintiffs in that litigation filed a motion to require the debtor to post $250 million in additional security.

In an effort to delay the district court's ruling on the bond motion, the debtor's Cayman Islands liquidator filed a petition in the U.S. Bankruptcy Court for the Southern District of New York seeking recognition of the Cayman Islands liquidation under chapter 15. Pending the bankruptcy court's ruling on the recognition petition, the liquidator sought provisional relief under section 1519 in the form of an order declaring that the automatic stay precluded continuation of the district court litigation. Various parties to the district court litigation objected to the liquidator's motion, arguing that the district court should be permitted to issue its ruling on the bond motion, which had been fully briefed and submitted. The liquidator countered that the debtor could not post additional security, and that the district court would accordingly enter a default judgment against it. 

The bankruptcy court denied the liquidator's motion for provisional relief. In so ruling, the court embraced the Worldwide court's approach to the standard for obtaining relief under section 1519 and rejected the contrary view articulated in Pro-Fit.

Applying the standard for a preliminary injunction, the bankruptcy court concluded that the Cayman Islands liquidator failed to show irreparable harm. According to the court, the district court might rule in the debtor's favor on the bond issue. Even if it did not, the bankruptcy court wrote, the debtor "would not suffer irreparable harm unless and until the district court proceed[ed] to enter a default judgment against [the debtor]." However, the bankruptcy court held that the liquidator could renew his motion for provisional relief if the district court issued its decision before the bankruptcy court ruled on the chapter 15 petition. 

Outlook

The Pro-Fit court's approach to the appropriate standard applicable to gap period relief in a chapter 15 case appears to be the minority view. Nonetheless, that court's criticism of the statutory language of section 1519(e) is not without merit. It is unlikely that lawmakers intended the forms of gap period relief available under section 1519 other than injunctive relief (e.g., examination of witnesses) to be subject to the preliminary injunction standard and to require an adversary proceeding. However, given the majority view followed by Beechwood, parties seeking relief under section 1519 should be prepared to comply with the standards, procedures, and limitations—including the evidentiary burden—associated with a request for injunctive relief. This is particularly true when gap period relief may turn on events outside the bankruptcy case. Finally, litigants should be mindful of the U.S. Supreme Court's anticipated ruling in Ritzen Group Inc. v. Jackson Masonry, LLC, No. No. 18-938 (argued on Nov. 13, 2019), with respect to the finality of orders and whether denial of gap period relief requests constitutes a "final" order in a "proceeding" such that it is immediately appealable.

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A version of this article was published in Lexis Practice Advisor and Law360. It has been reprinted here with permission.