Bankruptcy Court Holds That Foreign Debtor’s Chapter 15 Stay Is Not Here to Stay

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Contributed by Yvanna Custodio

How long does the automatic stay imposed through a chapter 15 recognition order protect a foreign debtor with U.S. assets?  Hint: It’s not forever.  In a recent bench memorandum issued by the United States Bankruptcy Court for the Southern District of New York in In re Daewoo Logistics Corp., the bankruptcy court addressed this issue, holding that a chapter 15 stay is “normally coterminous with the stay in the corresponding foreign proceeding.”

In In re Daewoo Logistics Corp., the debtor, a Korean company, applied for rehabilitation under the Debtor Rehabilitation and Bankruptcy Act of the Republic of Korea, which application the Korean court granted in 2009.  The debtor then filed a petition for recognition of the foreign main proceeding before the bankruptcy court, which the court granted.  The recognition order provided that, in accordance with section 1520(a) of the Bankruptcy Code, the debtor and its property were protected by the automatic stay and stayed the commencement or continuation of any proceedings against the debtor to the extent the proceedings had not previously been stayed under section 1520(a).

Unbeknownst to the bankruptcy court, the Korean rehabilitation proceeding closed on June 8, 2011, but, at that time, the debtor failed to notify the bankruptcy court of the status of the Korean proceeding.  Subsequently, a creditor that held an in rem maritime lien over a vessel the debtor chartered filed a complaint in the United States District Court for the Southern District of Texas seeking to arrest the vessel pursuant to its lien.  On June 14, 2011, the debtor filed a motion before the bankruptcy court seeking entry of an order to show cause prohibiting the creditor from enforcing its lien.  During the initial hearing on the debtor’s motion, the court noted that it was not inclined to grant affirmative relief that day, but also noted that it believed the automatic stay remained in effect.  The court’s hesitation in granting affirmative relief stemmed, in part, from its uncertainty regarding the status of the Korean proceeding.  At the hearing, the court called the debtor’s attention to section 1518 of the Bankruptcy Code, which requires the debtor’s foreign representative promptly to inform the court of, among other things, a change in status of the foreign proceeding, and instructed the debtor to file a “section 1518 statement” to clarify the status of the Korean proceeding.  It then scheduled a subsequent hearing during which the creditor would be required to show cause as to why its actions against the vessel were not prohibited.  Subsequently, in exchange for the release of the vessel, the creditor agreed to accept money as substitute security.

On July 25, 2011, the debtor filed its “section 1518 statement” explaining that the Korean proceeding had, in fact, been closed the previous month and prior to the filing of its motion.  Nonetheless, the debtor sought an order from the bankruptcy court directing the creditor to release the substitute security the debtor previously had posted, contending (among other things) that the arrest proceeding in the Texas court violated the stay imposed by the recognition order.  The creditor opposed the motion arguing that the stay ended when the Korean proceeding closed and, thus, its arrest of the vessel could not have violated the stay.  Ultimately, the bankruptcy court denied the motion, holding that the stay in the recognition order terminated at the close of the Korean rehabilitation proceeding.  The court observed that chapter 15 of the Bankruptcy Code incorporates the principles of international cooperation contained in the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency.  The court also noted the ancillary nature of a chapter 15 case and acknowledged that “a domestic court granting recognition acts in aid of the foreign main proceeding[.]”  Continuing the stay imposed by the recognition order, according to the court, would burden the creditors because it would prevent them from pursuing assets in the United States when such actions may not be prohibited under Korean law.  Such an act would be contrary to the ancillary nature of a chapter 15 proceeding because, upon the close of the Korean rehabilitation proceeding, the debtor no longer needed the protection of the automatic stay.

The bankruptcy court was careful to note that the close of a foreign proceeding does not necessarily prevent a foreign representative from enforcing the chapter 15 automatic stay in all circumstances.  For example, a foreign representative would still be able to seek an injunction of an entity that violated a stay order prior to the close of the foreign proceeding.  Similarly, where the foreign representative requests additional assistance from the court pursuant to section 1507, relief might be available.  In the Daewoo case, however, the creditor’s efforts to arrest the maritime vessel occurred after the Korean proceeding was closed, and the foreign representative did not seek additional assistance under section 1507 in the bankruptcy court.  Consequently, the bankruptcy court was unwilling (and, perhaps, unable) to fashion any relief for the debtor.

The In re Daewoo decision does not clarify why the debtor believed the automatic stay barred its creditor’s efforts to seize the vessel given that the Korean proceeding had been closed at the time the debtor filed its motion.  Perhaps the debtor thought that, because the recognition order remained in place in the U.S. bankruptcy court, it could still be enforced.  The result in In re Daewoo, however, highlights the U.S. bankruptcy court’s commitment to principles of comity as well as its deference to the foreign main proceeding.  Chapter 15 debtors seeking relief from a U.S. bankruptcy court should be aware that the status of the foreign main proceeding may affect their ability ultimately to obtain the desired relief.