Foreign Avoidance Action May Be Asserted in U.S. Chapter 15 Case

By: Shintaro Kitayama
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, the Fifth Circuit, in Condor Insurance Limited v. Petroquest Resources, Inc. (In re Condor Insurance Limited),[1]held that foreign representatives in a chapter 15 proceeding can assert an avoidance action under foreign law in a United States bankruptcy court.[2] The case was initiated when a foreign insurance company’s creditors filed a winding up petition, which is similar to a U.S. chapter 7 proceeding, in Nevis, [3] a small Caribbean island that is part of the Federation of Saint Kitts and Nevis. The Nevis liquidators filed a chapter 15 bankruptcy proceeding in Mississippi and sought to recover the assets under Nevis avoidance law. [4]  The Fifth Circuit held that section 1521(a)(7) allows a U.S. bankruptcy court to offer avoidance relief under foreign law.[5]

Once the court recognized the foreign proceeding as a foreign main proceeding, the foreign representatives had certain rights under chapter 15. Specifically, in the ancillary proceeding, the court could grant “‘any appropriate relief,’ including staying various aspects of the proceedings, suspending rights of transfer, providing for discovery, granting administrative powers to the foreign representatives and ‘granting any additional relief that may be available to a trustee . . . .’”[6] The foreign representatives, however, could not apply for relief using the Bankruptcy Code’s avoidance powers, which are explicitly excluded from available relief under section 1521(a)(7).[7] Generally, a foreign representative must initiate a plenary bankruptcy proceeding in the U.S. to receive the benefits of the U.S. avoidance powers.[8] The foreign representatives, however, could not file a petition for relief under chapter 7 or 11 because insurance companies are excluded from eligibility for U.S. bankruptcy. [9] 

The Fifth Circuit relied on statutory interpretation and legislative intent to allow the foreign insurance company to use the avoidance powers available under foreign law. [10] First, the court noted that section 1521(a)(7) provides enumerated exceptions for the available relief and that no other language in the statute suggests further exceptions.[11] In the absence of explicit language excepting foreign representatives’ avoidance relief, the court deemed such relief available.[12] Second, under section 304, chapter 15’s predecessor,[13] the courts allowed the use of avoidance powers provided by foreign law.[14] Moreover, the court found its ruling consistent with a long-standing effort of Congress “to harmonize international bankruptcy proceedings for the benefit of American businesses operating abroad.”[15] Third, the court found that not applying avoidance relief provided for by foreign law would undermine the legislative intent to “provide effective mechanisms for dealing with cases of cross-border insolvency . . . .”[16] Finally, the court found it proper to apply foreign law in order to avoid unnecessary choice-of-law issues.[17]

Condor Insurance is significant because it establishes that a bankruptcy court has jurisdiction over an avoidance claim, arising under foreign law, in a chapter 15 case. This ruling broadens both the range of the subject matter in U.S. bankruptcy cases and the possible relief for foreign representatives in foreign bankruptcy proceedings. In addition, the ruling is especially significant for entities that cannot be debtors under chapter 7 or 11 including foreign insurance companies[18] because avoidance powers would otherwise be unavailable to them in the U.S. Furthermore, this decision has further solidified the purpose of chapter 15, which is the facilitation of a fair and efficient insolvency administration among U.S. and foreign countries.