T he U.S. Bankruptcy Court for the Southern Subsequently, on Sept. - - PDF document

44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org

The Essential Resource for Today’s Busy Insolvency Professional

The International Scene

BY RICHARD J. CORBI1

Chapter 15 Limits Tested

T

he U.S. Bankruptcy Court for the Southern District of New York in Awal Bank, BSC2 held, among other things, that the foreign rep- resentative debtor was relieved of including creditor claim amount information in bankruptcy schedules, statements and monthly operating reports and that set-off actions pursuant to § 553 of the Bankruptcy Code are permitted in chapter 15 cases. This article

• nly addresses the bankruptcy court’s discussion of

the issues relating to § 521 of the Code and whether § 553 is applicable in chapter 15 cases.

Factual and Legal Analysis Relating to Disclosure Requirements

Charles Russell LLP in London, as external administrator of Awal Bank BSC (the “debtor”), commenced a bank insolvency proceeding in Bahrain.3 HSBC Bank USA, National Association was one of the debtor’s largest creditors. On July 30, 2009, the Central Bank of Bahrain (CBB) placed the debtor into an administration proceed- ing by Resolution No. 38 of 2009 and appoint- ed Charles Russell LLP to serve as the external administrator of Awal Bank.4 During the course

• f the administration proceedings in Bahrain, the

external administrator adopted a protocol for shar- ing information with creditors.5 Upon executing a confidentiality agreement, creditors that filed proofs of claim against the debtor were invited to attend quarterly meetings with the external admin- istrator and CBB for status updates on the admin- istration of Awal Bank’s assets.6 HSBC asserted a $75 million claim against the debtor and had been an active participant in the case by attending meet- ings in Bahrain.7 Subsequently, on Sept. 30, 2009, the external administrator applied for recognition of the admin- istration proceeding in Bahrain as a foreign main proceeding, which the bankruptcy court granted

• n Oct. 27, 2009.8 On Oct. 21, 2010, the external

administrator commenced a chapter 11 case for the purpose of avoiding a set-off that HSBC had taken.9 The external administrator then fjled a motion for relief from the requirements of § 521, which pro- vides that a debtor must fjle a list of creditors and certain statements and schedules unless the “court

• rders otherwise.”10 The external administrator even-

tually fjled amended schedules but also concurrently fjled a motion to omit the amount of the claims of individual creditors.11 HSBC objected to the debtor’s request for relief from the requirements of § 521 and to fjle the creditor claim information under seal.12 The bankruptcy court was confronted with whether the purposes of chapter 15 justify relief from the usual requirements of a plenary case, specifjcally the requirements of § 521. The exter- nal administrator asserted that limited disclosure was appropriate in the chapter 11 case because the effects of the chapter 11 case are more restricted because (1) Awal Bank’s sole U.S. asset was the potential recovery arising from the set-off action against HSBC, (2) there was a need to coordi- nate the chapter 11 and 15 proceedings with the Bahrain proceedings, (3) comity and deference to the Bahrain administration confjdentiality protocol was needed and (4) unnecessary expenses in light of the available information to creditors in the admin- istration in Bahrain needed to be avoided.13 HSBC asserted that no basis existed for the debtor to omit the creditor claim information. The bankruptcy court began its analysis by examining § 521(a)(1), which provides that a “debt-

1 The views expressed in this article are those of the author and do not reflect the views of the firm or any of its clients. 2 In฀re฀Awal฀Bank,฀BSC, 455 B.R. 73 (Bankr. S.D.N.Y. 2011). 3 Id. at 76. 4 Id. at 76. 5 Id. at 77. 6 Id. at 77. 7 Id. at 77. 8 Id. at 77. 9 Id. at 77. 10 Id. at 77 (citing 11 U.S.C. § 521). 11 Id. at 78. 12 Id. at 78. 13 Id. at 80.

Richard฀Corbi฀is฀ an฀associate฀with฀ Lowenstein฀Sandler฀ PC฀in฀New฀York฀ and฀serves฀as฀a฀ coordinating฀editor฀ for฀the฀ABI Journal.

44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org

• r shall fjle (A) a list of creditors; and (B) unless the court
• rders otherwise (i) a schedule of assets and liabilities;...

[and] (iii) a statement of the debtor’s fjnancial affairs.”14 The list of creditors contains names and addresses and is used for notice purposes only. The creditor claim amount information is included in the schedules as required by § 521(a) (1) (B), “a subsection that allows a court to ‘order otherwise’ with respect to disclosure.”15 Although no guidance exists in the statute as to when a court should relieve a party from disclosure requirements, the bankruptcy court acknowledged that numerous factors weighed in favor of granting the debtor’s requested relief. First, disclosure of the creditor claim amount information would disrupt the administration in Bahrain because credi- tors were provided that information under a confjdentiality agreement.16 Second, notwithstanding the plenary proceeding under chapter 11, the cooperation and coordination principles

• f chapter 15 remain applicable. In particular, § 1509(b)(3)

directs that after recognition, “a court in the United States shall grant comity or cooperation to the foreign representa- tive.”17 Even if no order of recognition has been entered by a court, § 1525 provides that a court in a plenary case in the U.S. “shall cooperate to the maximum extent possible with a foreign court or a foreign representative, either directly or through the trustee.”18 Third, the bankruptcy court noted that HSBC had not identifjed any specifjc need for the disclosure it advocates because it is the only U.S. creditor of the debtor and it has access to the confjdential information because it is involved in the administration in Bahrain and serves a mem- ber of the informal creditors’ committee in Bahrain.19 As a result, the bankruptcy court held that “good cause” existed to modify the debtor’s obligations under § 521(a) and permit the external administrator to fjle the schedules of assets and liabilities and operating reports without the creditor claim amount information.20

Factual, Legal Analysis Relating to Set-Off

“On Feb. 24, 2011, the External Administrator com- menced an adversary proceeding against HSBC in order to avoid and recover an allegedly improper set-off.”21 Pursuant to § 553, Awal Bank asserted that it was entitled to recover $12,996,220.98 that HSBC purported to set off against the $75,071,671.31 debt owed to HSBC by Awal Bank under a credit agreement.22 Awal Bank and HSBC entered into a short-term liquidity facility agreement on May 19, 2008, pro- viding an overdraft facility of $75 million (the “credit agree- ment”).23 On May 28, 2009, the credit agreement was ter- minated with $75 million outstanding.24 “On June 26, 2009, HSBC served Awal Bank with a notice of default under the credit agreement and demanded payment in the amount of $75,071,671.31.”25 “On July 17, 2009, after a derivative con- tract was closed out with surplus funds owing to Awal Bank, Royal Bank of Scotland (‘RBS’) electronically transferred $12,996,220.98 to Awal Bank’s deposit account at HSBC (the ‘Wire Transfer’).”26 Awal Bank asserted that the wire transfer was made in error, as Awal Bank instructed RBS to transfer the surplus funds to Awal Bank’s bank account with the Bank of Bahrain and Kuwait.27 The external administrator alleged that HSBC had constructive or actual notice that the wire transfer was sent to HSBC in error and that RBS noti- fjed HSBC of the error on July 30, 2009.28 HSBC contended that it immediately applied the funds from the wire trans- fer to the indebtedness under the credit agreement and did not learn of Awal Bank’s position until after the funds had already been applied.29 The external administrator received notice of the application of the funds to the Awal Bank on

• Aug. 7, 2009.30

The U.S. Bankruptcy Court for the Southern District of New York examined whether an avoidance action under § 553(b) could be brought in a chapter 15 case.31 The plain language of § 1521(a)(7) permits the court to grant the for- eign representative “any additional relief that may be avail- able to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550 and 724(a).”32 The court noted that avoidance §§ 553 and 549 are omitted from the statute. Furthermore, the bankruptcy court examined the legislative history of § 1521(a)(7) because no reported authority exist- ed as to why § 553 was omitted from § 1521(a)(7) of the Bankruptcy Code.33 The legislative history states that “[t]his limited grant of standing in section 1523 does not create or establish any legal right of avoidance nor does it create or imply any legal rules with respect to the choice of applicable law as to the avoidance of any transfer or obligation. The court will determine the nature and extent of any such action and what national law may be applicable to such action.”34 The bankruptcy court explained that although the leg- islative history “speaks broadly of U.S. ‘avoidance law’ as being within the exclusion, and does not distinguish among the avoidance provisions of the Bankruptcy Code,” nothing indicates that the omission of § 553 was a “drafting error.”35 The bankruptcy court explained that “[t]he plain meaning

• f the statutory language must ordinarily govern when [it

does] not lead to an absurd result.”36 The court concluded that “[a] determination that a recognized foreign representa- tive can be afforded the power in a chapter 15 ancillary case to avoid a preferential set-off, but not to avoid most other prejudicial transfers, such as a fraudulent conveyance or a preference, does not lead to an absurd result.”37 “Section 553 provides for the recovery of property, not just the avoid- ance of a transfer.” As a result, the Bankruptcy Court for the Southern District of New York denied HSBC’s motion to dismiss the adversary proceeding. The Awal decision provides an interesting avenue for the foreign representative or debtor, whichever the case may be,

14 11 U.S.C. § 521(a)(1). 15 Awal, 455 B.R. at 81. 16 Id. at 81. 17 Id. at 81 (quoting 11 U.S.C. § 1509(b)(3)). 18 Id. at 81-82 (quoting 11 U.S.C. § 1509(b)(3)). 19 Id. at 82. 20 Id. at 83. 21 Id. at 78. 22 Id. at 78. 23 Id. at 78. 24 Id. at 78. 25 Id. at 78. 26 Id. at 78. 27 Id. at 79. 28 Id. at 79. 29 Id. at 79. 30 Id. at 79. 31 Id. at 86. 32 11 U.S.C. § 1521(a)(7). 33 Awal, 455 B.R. at 87. 34 Id. at 87. 35 Id. at 87. 36 Id. at 87 (citing Lamie฀v.฀United฀States฀Trustee, 540 U.S. 526, 538, 542 (2004)). 37 Id. at 87.

44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org in chapter 15 cases to commence certain avoidance actions. The sole purpose of the external administrator’s commence- ment of the plenary chapter 11 case was to bring the § 553 set-off adversary proceeding against HSBC. The court, while analyzing the plain language of § 1521(a)(7) as to what avoidance actions chapter 15 permitted, did not exam- ine whether the external administrator’s act was not in the spirit of chapter 15. The Awal court possibly opened the door for foreign debtors to work their way around the avoidance action carve-outs of § 1521(a)(7) or commence improper related avoidance action proceedings to obtain relief unavail- able under other sections of the Bankruptcy Code.38

Conclusion

The Awal decision illustrates another test of certain limi- tations of avoidance powers and disclosure requirements in chapter 15 and chapter 11 cases that will continue to confront U.S. courts. abi Reprinted฀with฀permission฀from฀the฀ABI฀Journal,฀Vol.฀XXXI,฀No.฀7,฀ August฀2012. The฀American฀Bankruptcy฀Institute฀is฀a฀multi-disciplinary,฀non- partisan฀organization฀devoted฀to฀bankruptcy฀issues.฀ABI฀has฀ more฀than฀13,000฀members,฀representing฀all฀facets฀of฀the฀ insolvency฀fjeld.฀For฀more฀information,฀visit฀ABI฀World฀at฀www. abiworld.org.

38 See฀generally, Hon. Francis G. Conrad and Richard J. Corbi, “Are Preference Lawsuits Permitted in Chapter 15 Cases? A Tale of Two Decisions,” 29 Am.฀Bankr.฀Inst.฀J. 34 (May 2010) (article discusses two chapter 15 decisions, In฀re฀Condor฀Ins.฀Ltd., 601 F.3d 319 (5th Cir. 2010), and In฀re฀Atlas฀Shipping฀A/S, 404 B.R. 726 (Bankr. S.D.N.Y. 2009), that provided for avoidance of certain transfers that were brought under foreign law or maritime law, respectively without commencement of plenary chapter 7 or 11 case). See฀also฀In฀re฀Condor฀Ins.฀Ltd., 601 F.3d 319, 326 (5th Cir. 2010) (creditors subject to avoidance actions argued, to no avail, that foreign representative was being permitted to “section shop, bringing a Chapter 15 ancillary proceeding when they seek to use foreign law and a Chapter 7 or 11 proceeding when they seek to use U.S. law.” Fifth Circuit subsequently permitted foreign debtor to bring avoidance actions under foreign law).