U.S. Bankruptcy Court does not enforce an asset freeze order from a Brazilian insolvency proceeding recognized under chapter 15 of the Bankruptcy Code.
Takeaways
- Recognition of a foreign proceeding under chapter 15 of the Bankruptcy Code does not mean that all orders entered in the foreign proceeding shall be likewise recognized or enforced by the U.S. court.
- An order from a recognized foreign insolvency proceeding will not be afforded comity and enforced where the relief granted by the order would violate basic public policy of the United States.
Upon recognition of a foreign insolvency proceeding under chapter 15 of the U.S. Bankruptcy Code, the foreign debtor may request additional assistance from the U.S. Bankruptcy Court under section 1507 or additional relief under section 1521. Such additional relief often includes requests to recognize and enforce in the United States specific orders entered by the foreign court. While such requests are freely granted, there are limits to the relief a foreign debtor may receive. For example, in In re Nexgenesis Holdings Ltda., No. 22-14043-BKC-LMI, 2024 WL 3616732 (Bankr. S.D. Fla. July 31, 2024) (In re Nexgenesis), the bankruptcy court denied the foreign representatives’ request for recognition of an asset freeze order because, among other reasons, it would be manifestly contrary to U.S. public policy to recognize the order, even though the Brazilian insolvency proceeding had been recognized as a foreign main proceeding under Chapter 15.
The Asset Freeze Order
The debtors were part of a Japanese technology conglomerate’s operations in Brazil that provided web-based services mainly related to e-commerce. The debtors were placed into a voluntary joint reorganization in Brazil, which, at their request, was later converted to a liquidation, and the foreign representative was appointed as the judicial administrator of the debtors’ estate.
In the Brazilian bankruptcy case, the foreign representative filed an adversary proceeding (the “Veil Piercing Action”) seeking to pierce the debtors’ corporate veil and alleging mismanagement of the debtors, self-dealing, and other misconduct on the part of 15 corporate entities and individuals (the “Respondents”). In that case, the foreign representative made an ex parte application for what was essentially a so-called Mareva injunction freezing cash and other assets, up to USD $29 million, owned by the Respondents, wherever situated, pursuant to a procedure available under Brazilian law that has the effect of holding a non-debtor liable for damages. Mareva injunctions get their name from the case Mareva Compania Naviera SA v. International Bulkcarriers, [1980] 1 ALL E.R. 213, [1975] 2 Lloyd’s L.R. 509 (C.A.) and generally refer to injunctions that are often entered on an ex parte basis at the commencement of litigation that prevent a party from disposing of certain of its assets in order to render itself judgment proof.
The Brazilian court granted the foreign representative’s ex parte motion (the “Asset Freeze Order”). The Asset Freeze Order acknowledges that the frozen assets were separate assets of the Respondents and not property of the debtors’ bankruptcy estate in Brazil, but it nevertheless rendered those assets inalienable pending a trial on the merits of the foreign representative’s claims against the Respondents. The Asset Freeze Order was entered by the Brazilian court without service or notice upon any of the Respondents. It further appears that, at least as respect to those parties who objected to the foreign representatives’ motion for recognition of the Asset Freeze Order (the “Objectors”), the foreign representative’s underlying complaint did not include any allegations concerning wrongful conduct by them. (See 2024 WL 3616732, at *4.)
The debtors’ foreign representative had previously obtained recognition of the Brazilian bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”) pursuant to chapter 15 of the Bankruptcy Code and later sought recognition and enforcement of the Asset Freeze Order. The Bankruptcy Court would not enforce the Asset Freeze Order because the order “is inconsistent with principles of comity, is not relief which a bankruptcy trustee could obtain, and would be manifestly contrary to U.S. public policy.” (See 2024 WL 3616732, at *1.)
Comity Under Chapter 15
Recognizing a foreign proceeding under chapter 15 of the Bankruptcy Code does not mean that all orders entered in the foreign proceeding shall be likewise recognized or enforced by the U.S. court. Indeed, while chapter 15 codifies principles of comity, it also imposes “certain requirements and considerations that act as a brake or limitation on comity.” See In re Fairfield Sentry Limited, 768 F.3d 239, 245 (2d Cir. 2014) (citing In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1054 (5th Cir. 2012) (comity “is an important factor in determining whether relief will be granted” under chapter 15, but it is not a per se rule). The structure of chapter 15 itself makes clear that not at all orders entered by the foreign court are automatically adopted by the U.S. court, but rather, after recognition, the bankruptcy court may grant comity to orders entered by the foreign court as “additional assistance” under section 1507 of the Bankruptcy Code, or as “additional relief” under section 1521 of the Bankruptcy Code.
Relief may be granted under Section 1507 where such relief is consistent with principles of comity and relief may be granted under Section 1521 to the extent that such relief would be available to a trustee under the Bankruptcy Code. In either case, the bankruptcy court can deny any requested relief that would be manifestly contrary to the public policy of the United States.
In In re Nexgensis, the Bankruptcy Court described the foreign representative’s request as one that asked the “court to enforce a pre-judgment attachment against non-debtors’ assets in furtherance of unadjudicated claims for damages against these non-debtors.” Such relief is generally not available as a matter of federal law. (See Groupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 119 S.Ct. 1961 (1999).) As set forth more fully below, the Bankruptcy Court had no trouble in denying the foreign representative’s motion on that basis. The Bankruptcy Court also ruled that it would deny comity to the Asset Freeze Order on the ground that the Brazilian court lacked personal jurisdiction over the Respondents. Indeed, the foreign representative’s pleadings in support of the Asset Freeze Order did not include any facts relating to personal jurisdiction.
Prohibition Against Pre-Judgment Attachments to Secure a Potential Money Judgment
In Grupo Mexicano, the U.S. Supreme Court determined that Federal Rule of Civil Procedure 65 does not grant federal courts the authority to issue preliminary injunctions preventing defendants from disposing of their assets pending the resolution of a plaintiff’s claim for money damages. In other words, Rule 65 does not permit federal courts to grant Mareva injunctions.
The Foreign Representative nonetheless argued that recognition of the Asset Freeze Order was appropriate under section 1521 because the relief requested in the Veil Piercing Action was similar to relief that a trustee appointed under the Bankruptcy Code could obtain. Essentially, the Foreign Representative argued that in “appropriate circumstances,” bankruptcy courts have been willing to grant preliminary injunctions prohibiting certain asset transfers by defendants in litigation. The Bankruptcy Court found the Foreign Representative’s arguments unpersuasive as they were based on cases where the trustee sought to prohibit transfers of debtor assets (which is not the case here) and where the trustee sought equitable relief and not damages. By contrast, the Foreign Representative’s claims were for damages, not equitable relief, and sought to prevent the transfer of third-party, not debtor, assets. The Bankruptcy Court summarized its ruling by holding that “[t]here is no support for the Foreign Representative’s proposition that a U.S. bankruptcy trustee would be entitled to a pre-judgment freeze of non-debtor assets based on a claim seeking to hold the non-debtor liable for monetary damages ….” (See In re Nexgenesis, 2024 WL 3616732, at *10.)
Conclusion
Recognition of a foreign insolvency proceeding under chapter 15 of the Bankruptcy Code does not carry with it recognition of every order entered by the foreign court. Instead, while chapter 15 codifies common law rules of comity by which U.S. court give deference to foreign court orders, it also imposes checks and limits on those rules and requires that to grant comity to foreign court orders, those orders must satisfy certain standards imposed by U.S. law.
Does this mean that foreign representatives are required to sit idly by while the assets they seek to recover for creditors are dissipated?
No.
Why?
In re Nexgenesis, and other cases applying Groupo Mexicano to prohibit what are functionally Mareva injunctions, have been decided under federal law under Rule 65 of the Federal Rules of Civil Procedure. But the result may be different where the relief is requested (1) pursuant to state law or Rule 64, under which state law remedies are available, and (2) based on equitable claims. For example, when a plaintiff raises the equitable claim that a party fraudulently transferred assets to another, it “asserts an equitable interest in the property it alleges [the party] fraudulently transferred.” See Paradigm Biodevices, Inc. v. Centinel Spine, Inc., No. 11 Civ. 3489, 2013 WL 1915330 at *3 (S.D.N.Y. May 9, 2013); see also United States ex rel. Rahmen v. Oncology Assocs., P.C., 198 F.3d 489, 498 (4th Cir. 1999) (“request to void transfers as fraudulent—a form of rescission—is also an equitable remedy”); In re Acis Cap. Mgmt., L.P., No. 18-30264-SGJ-11, 2019 WL 417149, at *13 (Bankr. N.D. Tex. Jan. 31, 2019) (“claims … to avoid fraudulent transfers seek equitable relief”), aff’d, 604 B.R. 484 (N.D. Tex. 2019), aff’d sub nom. Matter of Acis Cap. Mgmt., L.P., 850 F. App’x 302 (5th Cir. 2021). The Supreme Court in Grupo Mexicano specifically declined to bar injunctive relief based on state statutory fraudulent transfer actions. (See Grupo Mexicano, 527 U.S. at 324 n.7.) Since then, “courts have held that Grupo Mexicano thus exempts from its proscription against preliminary injunctions freezing assets cases involving fraudulent conveyances.” (See Iantosca v. Step Plan Servs., 604 F.3d 24, 33 (1st Cir. 2010) (alteration and quotation omitted) (collecting cases).)
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