Chapter 15 of the US Bankruptcy Code is a powerful tool for foreign companies seeking to protect their US assets while undergoing foreign insolvency proceedings. By filing a Chapter 15 petition in a US bankruptcy court, a foreign debtor can obtain recognition of its foreign insolvency case, which provides a number of benefits. These include a freeze on any attempts to collect debts or seize assets in the US (known as the "automatic stay") and the ability to seek the US court's assistance in managing the debtor's US assets and coordinating with the foreign proceeding.

In a recent bench ruling in the Chapter 15 cases of Goli Nutrition Inc., Judge Laurie Selber Silverstein of the US Bankruptcy Court for the District of Delaware addressed several novel issues regarding a US court's authority to approve sales of a foreign debtor's US assets and resolve related ownership disputes. The case involved a Canadian debtor seeking Chapter 15 recognition of its Canadian insolvency proceedings in the US, as well as approval of a proposed sale of disputed assets located in California. An objecting party claimed ownership of some of the assets, leading the court to examine the interplay between US and foreign courts in resolving ownership disputes and approving asset sales in Chapter 15 cases.

Key takeaways from the ruling include:

  • Under section 1520(a)(2) of the Bankruptcy Code, the US bankruptcy court has in rem jurisdiction over a foreign debtor's US assets and is charged with approving their transfer.
  • Under section 363 of the Bankruptcy Code, sale approval is required to transfer a foreign debtor's US assets, but the issuance of new stock by the foreign debtor as part of a restructuring is not a sale transaction under section 363.
  • The court cannot approve the sale of property in which the debtor has no interest. Bona fide ownership disputes must be resolved before the court can approve a sale of the disputed assets.
  • The US court has the authority to decide ownership disputes involving US assets, but may defer to a foreign court in appropriate circumstances, such as when the foreign court is already adjudicating the ownership issue.
  • Unless ownership is undisputed, the court cannot relegate a non-debtor property owner's interest to sale proceeds. The one exception is if the debtor is selling its disputed interest in the property.

Judge Silverstein's ruling highlights the complex interplay between US and foreign courts in Chapter 15 cases. While Chapter 15 empowers US courts to apply section 363 to sales of a foreign debtor's US assets, principles of comity may warrant deference to foreign courts on certain issues, such as ownership disputes already pending before the foreign court.

Parties in Chapter 15 cases involving US assets should carefully navigate these jurisdictional dynamics and consider the implications of Judge Silverstein's ruling when developing their strategies. The ruling underscores the importance of promptly identifying and resolving ownership disputes, as they can significantly impact the timing and structure of proposed asset sales.

For more information about the Goli Nutrition ruling and its potential implications for your Chapter 15 case, please contact Jeffrey Reisner.

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