SDNY Narrows the Extraterritorial Reach of the Automatic Stay Available under Chapter 15 of the Bankruptcy Code for a Debtor in a Foreign Main Proceeding

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Contributed by Maurice Horwitz

The extent of the automatic stay’s extraterritorial reach under chapter 15 of the Bankruptcy Code has been more clearly defined by a memorandum decision entered on August 23, 2010 by the United States Bankruptcy Court for the Southern District of New York in In re JSC BTA Bank, Case No. 10-10638, 2010 WL 3306885 (Bankr. S.D.N.Y. Aug. 23, 2010) (Peck, B.J.).

In JSC BTA Bank, the debtor, JSC BTA Bank (“BTA Bank”), one of the largest banks in the Republic of Kazakhstan, commenced reorganization proceedings in Kazakhstan on October 16, 2009, and subsequently sought recognition of the Kazakh proceeding under chapter 15.  The bankruptcy court granted recognition of the Kazakh proceeding as a main proceeding in March of 2010, along with the relief set forth in section 1520 of the Bankruptcy Code “including, without limitation, the application of the protection afforded by the automatic stay under section 362(a) of the Bankruptcy Code to the Bank worldwide and to the Bank’s property that is within the territorial jurisdiction of the United States.”  Id. at 8 – 9.

Between the commencement of BTA Bank’s reorganization proceeding in Kazakhstan, and the entry of the recognition order by the bankruptcy court, an arbitration proceeding was commenced in Switzerland against BTA Bank by Banque International de Commerce – BRED Paris, succursale de Geneve, Switzerland (“BIC-BRED”).  In the arbitration proceeding, BIC-BRED sought a determination that BTA Bank breached a loan agreement and was liable to BIC-BRED for the amount of the loan, including damages and interest.  When BTA Bank’s attempts to stay the arbitration proceeding failed in Switzerland, the foreign representative of BTA Bank filed a motion in BTA Bank’s chapter 15 case seeking to hold BIC-BRED in contempt for a willful violation of the automatic stay.

An issue of first impression, the bankruptcy court examined whether the automatic stay, which, upon the entry of the bankruptcy court’s recognition order, became applicable to BTA Bank and its property within the territorial jurisdiction of United States, operated as a stay against the pending arbitration proceeding brought by BIC-BRED.  BTA Bank argued that, although the automatic stay made applicable by section 1520(a) of the Bankruptcy Code applies to the debtor’s property only within the territorial United States, the automatic stay applies to the debtor anywhere in the world.   Although the bankruptcy court recognized BTA Bank’s reading of section 1520(a) as literally correct, it concluded that the interpretation advanced by BTA Bank “disregards the international origins and purposes of chapter 15 and leads to absurd consequences that could not have been intended by Congress or the international experts in insolvency law who drafted the Model Law on Cross-border Insolvency on which chapter 15 is based.” Id. at 4.

The bankruptcy court noted that the purpose of chapter 15 is for a debtor in a foreign proceeding to commence an ancillary proceeding for the purpose of assisting in the administration of the foreign proceeding.  It should not, therefore, serve as a means of obtaining global relief that could not have been obtained by the order of the court overseeing the foreign main proceeding.   The bankruptcy court acknowledged that the automatic stay under chapter 15 may extend to the debtor in foreign jurisdictions in appropriate circumstances, e.g., where the foreign litigation or arbitration proceedings have a meaningful nexus to property of the debtor in the United States.  Ultimately, however, it concluded that staying the arbitration proceeding pending in Switzerland, which pertained to two foreign banks involved in a transaction that had no connection to the United States or the debtor’s property within the territorial jurisdiction of the United States, would contravene the purpose of chapter 15.

Based on In re JSC BTA Bank, in cases where a proceeding is recognized as a foreign main proceeding under chapter 15 of the Bankruptcy Code, the foreign representative should not expect the automatic stay to apply extraterritorially to the debtor in a foreign arbitration or other proceeding, “except in those situations where there is a demonstrated relationship between that proceeding and property of the debtor within [the United States].”  Id. at 25.