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Does the New Kid, Chapter 15, Have Staying Power?

Does the New Kid, Chapter 15, Have Staying Power?

A mention of bankruptcy elicits two responses: (1) will I get paid? and (2) what is the automatic stay? In addressing these two questions, chapter 15 is a different dance; there is no order for relief, no discharge, no distribution and no plan. Instead, the order for relief, discharge, distribution, and plan are subjects of the foreign proceeding or a subsequently filed chapter 7, 11, 12, or 13 case. Likewise, there is no “automatic” stay upon the filing of a chapter 15 petition for recognition. Nonetheless, chapter 15 empowers the court with authority to issue stays.

Section 362 of the Bankruptcy Code, the “automatic stay” provision, though not imposed automatically in chapter 15, results by the court effecting an order of recognition. Upon recognition, actions against the debtor and the property of the debtor that is within the territorial jurisdiction of the United States are stayed by section 1520(a). Section 362 ordinarily stays actions against a triad of beings: the debtor, property of the debtor, and property of the estate. In chapter 15, there is no bankruptcy estate; therefore, no need to stay actions against property of the estate. Furthermore, chapter 15 only stays actions against property in the territorial jurisdiction of the United States and this also reflects the absence of a bankruptcy estate that consists of property “wherever located and by whomever held.” Limiting the stay to the territorial United States assures deference and comity to the foreign proceeding and that court’s jurisdiction.

Though a stay results by effect of the order of recognition, a gap with no stay protection exists between the filing of a petition for recognition until the court grants that petition. This gap craters for at least 21 days, allowing for due process, and may widen upon objections to the petition. This means any actions during the gap period are not stayed and the debtor and the debtor’s property are exposed to normal process.

Yet upon the request of the foreign representative, the court may impose a temporary stay under § 1519 that terminates when the petition is granted. This temporary stay is extremely limited; it applies only when needed to “urgently protect the assets of the debtor or the interests of the creditors” and cannot be used to stay ongoing litigation other than acts to execute on the debtor’s assets. The standards, procedures, and limitations applicable to injunctions apply. Bankruptcy Rules 7001(7) and 7065 seemingly imply that the temporary stay should be brought in an adversary proceeding, but several courts have held that a court may grant provisional relief under section 1519 without imposing the adversary procedures for an injunction. See In re Pro-Fit Holdings Ltd., 391 B.R. 850 (Bankr. C.D. Cal. 2008). The prudent course of action, here, is to commence an adversary proceeding to obtain an injunction and guarantee full protection.

Though terminating upon the order of recognition, this injunctive relief may be revived under § 1521 after the entry of an order of recognition and may overlap with the stay imposed under § 1520(a). Furthermore, under § 1522, an injunction under §§ 1519 and 1521 may be granted only if the interests of the creditors and other interested entities are sufficiently protected. The court exercises broad discretion to condition this injunction as it considers appropriate, including the giving of security or the filing of a bond.

All that said, the answer to our original second question is that there is no “automatic” stay initially in chapter 15 but there is a strong emphasis that the court will not let the debtor’s domestic assets remain untethered during the gap period until the winds subside with the imposition of the “automatic stay” by effect of the order of recognition. The bankruptcy courts, exercising jurisdiction in chapter 15 cases, have staying power. This power also extends to relief from the stay as bankruptcy courts are authorized to condition, modify, or terminate the temporary stay under §§ 1519 and 1521 and condition, modify, annul, or terminate the “automatic stay” that arises by order of recognition under §§ 1520 and 362. This stay power assures the just, speedy, inexpensive, orderly, and coordinated determination of every chapter 15 proceeding but also assures that chapter 15 is not used as both a shield and a sword.

Adam M. Langley

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