JSC BTA Bank (BTA), one of Khazakstan‚Äôs largest banks, sought restructuring under the guidance of the Kazakh government early this year.¬† A prior post on BTA‚Äôs protective filing is available here.¬† BTA‚Äôs recognition order granted BTA “all of 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.”
Among its obligations, BTA was in default on a $20 million advance from Banque International de Commerce ‚Äď BRED Paris, succursale de Geneve, Switzerland (“BIC-BRED”) for the construction of an entertainment complex in Moscow.¬† BIC-BRED commenced Swiss arbitration proceedings regarding this obligation.
After BTA commenced its Khazakh restructuring and obtained recognition in the US, it submitted a statement in the arbitration, requesting a stay of the arbitration and claiming the universal application of the automatic stay.¬† BIC-BRED refused to acknowledge the reach of the stay in BTA‚Äôs ancillary case.¬† Apparently, so did the arbitrator:¬† An award in the Swiss proceedings was entered in July 2010 against BTA.
BTA sought a determination that the automatic stay did, in fact, apply – and that BIC-BRED ought to be sanctioned for its continued prosecution of the Swiss arbitration.
In a decision issued late last month, Presiding Judge James Peck summarized the basis for his restrictive reading of the automatic stay as follows:
If the provision regarding the automatic stay in chapter 15 cases were to be construed in the manner urged by the Foreign Representative, even the court in the foreign main proceeding in Kazakhstan would be subject to the stay and would need permission from this Court before taking any action that might impact the foreign debtor.¬† No rational cross-border insolvency regime would give a bankruptcy court in the United States so much unintended automatic extraterritorial power in conjunction with the recognition of a foreign proceeding . . . .¬† [A]ny application of the language of section 1520(a)(1) should reject an extraterritorial interpretation that would stay miscellaneous foreign litigation or arbitration proceedings having no meaningful nexus to property of the foreign debtor located in the United States.
Instead, he concluded that
[T]he automatic stay does not afford broad anti-suit injunctive relief to the debtor entity outside the territorial jurisdiction of the United States upon entry of an order of recognition in a chapter 15 case. This conclusion is based on the need to respect the international aspects of [chapter 15], the limited and specialized definition of the term ‚Äúdebtor‚ÄĚ when used in chapter 15, and the fact that cases under chapter 15 are ancillary in nature and do not create an estate within the meaning of section 541 of the Bankruptcy Code.
This is not to say, however, that the automatic stay arising under the US Bankruptcy Code is limited to the territorial reach of the US.
After reviewing ‚Äď and rejecting ‚Äď the administrator‚Äôs interpretation of how the automatic stay ought to apply in ancillary cases ‚Äúto the debtor and the property of the debtor that is within the territorial jurisdiction of the United States‚ÄĚ Judge Peck went on to offer two possible legitimate interpretations (the Court had previously reviewed ‚Äď and rejected ‚Äď the administrator‚Äôs alternative interpretation):
One possibility, but a terribly strained one, would be to construe the territorial limitation within section 1520(a)(1) as extending to both the debtor and its property. Such a reading would limit the effect of the automatic stay to actions against a debtor commenced within the United States and to debtor property located here and would tie the word ‚Äėdebtor‚Äô to the phrase ‚Äėwithin the territorial jurisdiction of the United States.‚Äô That reading is consistent with international cooperation and avoids absurd results but fails to account for placement of the words ‚Äėthat is‚Äô within the text of this sentence. Those words break the connection between the debtor and the United States.
An alternative, and better ‚Äúreading of section 1520(a)(1), and one that is consistent with the plain meaning of the words as written, is that the stay arising in a chapter 15 case upon recognition of a foreign main proceeding applies to the debtor within the United States for all purposes and may extend to the debtor as to proceedings in other jurisdictions for purposes of protecting property of the debtor that is within the territorial jurisdiction of the United States. This more limited extraterritorial application of the automatic stay to the debtor entity fulfills the cross-border purposes of chapter 15 within the United States without broadly imposing a stay on all actions or proceedings against the debtor including those lacking any proper connection to the chapter 15 case.‚ÄĚ
Under the latter reading, then, the automatic stay is applicable world-wide, but only where necessary to protect the US Bankruptcy Court‚Äôs in rem jurisdiction over the foreign debtor‚Äôs domesticated property.
The BTA decision is noteworthy in a broader context as well:
- This decision is one of several recent cases in which Bankruptcy Courts have sought to negotiate otherwise difficult applications of the Code‚Äôs other provisions within the context of Chapter 15 through an appeal to interpretation based on the statute‚Äôs ‚Äúinternational aspects.‚ÄĚ¬† ‚ÄúInternational‚ÄĚ in these cases really means ‚Äúuniversal‚ÄĚ ‚Äď Courts applying this statute have gone to some lengths to employ Chapter 15 as a vehicle for extending universal administration of the ‚Äúmain case,‚ÄĚ wherever that case is located.
- But ‚Äúuniversalism‚ÄĚ only goes so far:¬† In Judge Peck‚Äôs view, ‚ÄúThe bankruptcy court, at least in the setting of an ancillary chapter 15 case, should not stand in the way of a foreign arbitration process when the outcome will have no foreseeable impact on any property of the foreign debtor in the United States.‚ÄĚ¬† ¬†But what if the outcome of such litigation did have foreseeable impact on such property?¬† The answer, according to Judge Peck, is clear:¬† The US Bankruptcy Court‚Äôs in rem jurisdiction may not be trifled with, no matter where such efforts might occur.
- This decision nevertheless suggests an additional area of ‚Äúsection shopping‚ÄĚ ‚Äď i.e., the strategic employment of plenary or ancillary procedures to take advantage of various protections or remedies arising under the laws of the jurisdictions involved.¬† Similar considerations attend the availability and application of avoidance powers arising under Sections 1521 and 1523 and Section 544 (which affords recoveries to unsecured creditors that would be available under ‚Äúnon-bankruptcy law‚ÄĚ).¬† See Tacon v.Petroquest Res. Inc. (In re Condor Ins. Ltd.), 601 F.3d 319, 329 (5th Cir. 2010) (foreign representative of foreign proceeding authorized to pursue non-US avoidance claims against US defendants through ancillary proceeding), and a related post here.