One might wonder whether the recent Court of Appeals decisions interpreting Chapter 15 have read section 1506 out of the law because they seem to reject the application of foreign bankruptcy principles based on a simple balancing test, rather than rejecting only those requests that are “manifestly contrary to the public policy of the United States” as section 1506 suggests.  See 11 U.S.C. § 1506.  Just a few days ago, the Fourth Circuit used a balancing test to deny relief to the German insolvency administrator of Qimonda AG because application of German bankruptcy principles to U.S. patent licensees would terminate their rights to use the patents, contrary to the special protection provided to patent licensees under section 365(n) of the United States Bankruptcy Code.  See Jaffe v. Samsung Electronics Co., Ltd., ___ F.3d ___ , 2003 WL 6388591 (Dec. 3, 2013) (yes, Westlaw did incorrectly give it a 2003 citation).  This follows on last year’s Fifth Circuit’s opinion in In re Vitro, 701 F.3d 1031 (5th Cir. 2012), that used a balancing test to refuse to enforce a third-party non-debtor release arising from a Mexican bankruptcy proceeding.  What is going on here?

First, it is important to note that Chapter 15, which provides for recognition of and co-operation with foreign bankruptcy proceedings, is a new law and the courts are still struggling to interpret it.  That task is made more difficult by Chapter 15’s tendency to provide for similar (and perhaps overlapping) relief in multiple sections.  While the recent decisions seem contrary to Chapter 15’s overarching policy of cooperation, they make sense as a reasonable reading of the statutory text.  Here’s how – Chapter 15 distinguishes between the types of relief that a foreign representative is given automatically upon recognition and additional relief that can be granted upon request.  Thus, for example, the section 362 stay automatically applies to all United States assets immediately upon recognition of a foreign main proceeding under section 1520(a)(1), but the section 365 power to assume, reject or assign executory contracts applies only if the Bankruptcy Court so orders under section 1521(a)(7).  As I noted above, confusion arises because section 1507 might provide an additional avenue to use section 365 under its authorization of “additional assistance.”   Nonetheless, it is this distinction between discretionary relief like that available under sections 1507 and 1521 and automatic relief that keeps the section 1506 “manifestly contrary” standard meaningful.

The recent cases read the section 1506 “manifestly contrary” standard as setting an outer limit to permissible co-operation that applies to any action taken under Chapter 15, whether discretionary or non-discretionary.  In addition to the outer limit set by section 1506, Chapter 15 sets a more restrictive standard for the court’s exercise of discretion.  For example, the court can grant “additional relief” under section 1521(a)(7) “only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.”  See 11 U.S.C. § 1522(a).  Similarly, the court must “consider” comity and a multi-factor test in determining whether to provide “additional assistance” under section 1507.  Thus, although any requested relief that was manifestly contrary to the public policy of the United States would likely also fail the applicable balancing or factor test, the converse is not necessarily true.