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October 15, 2019

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What Avoidance Powers Are Available Under Chapter 15 of the Bankruptcy Code?

Chapter 15 of the Bankruptcy Code was enacted to give representatives of foreign liquidators recognition in U.S. courts for foreign insolvency proceedings.  When a court recognizes a foreign representative and a foreign proceeding, one question that arises is whether the representative can take advantage of avoidance powers like those that are available for domestic bankruptcies—such as avoiding preferential or fraudulent transfers.  A foreign representative’s powers, however, are not coextensive with those of a Chapter 7 or Chapter 11 trustee.  Chapter 15 expressly excludes the substantive avoidance powers that are usually available under U.S. law and foreign liquidators cannot use such powers without filing a separate Chapter 7 or Chapter 11 case.  Notwithstanding that statutory command, a series of court decisions interpreting Chapter 15 has given representatives of foreign liquidations options to invoke avoidance powers under foreign law.  This article summarizes a foreign liquidator’s options for invoking avoidance powers.


An international client calls: the business is insolvent, and will enter foreign liquidation proceedings where the client is based abroad.  Worse yet, significant funds were transferred away from the company leading up to the insolvency.  Moreover, it appears that some of those transfers may have been fraudulent—including transfers involving assets in the U.S.

Your client tells you that the foreign jurisdiction’s courts will appoint a liquidator, and you know that Chapter 15 of the U.S. Bankruptcy Code will allow that liquidator to seek recognition in U.S. courts.  And, you know that U.S. bankruptcy law typically provides for avoidance powers in domestic bankruptcies, such as avoiding preferential transfers made within 90 days prior to the bankruptcy, or avoiding fraudulent transfers made within one year prior to the bankruptcy.  See,.e.g., 11 U.S.C. §§ 547, 548.  But you need to answer a particular question for your client—can your law firm assist the foreign liquidator in U.S. courts and use those domestic avoidance powers to restore preferential or fraudulent transfers to the debtor? 

To know how to address that question, a careful look both at Chapter 15 and at court opinions interpreting Chapter 15 is essential.

Basic Principles under Chapter 15: Recognition, Efficient Administration, and Comity

Whether foreign liquidators can invoke avoidance powers depends, of course, on the contents of the relevant bankruptcy code provisions—but also on the purposes underlying that statutory scheme.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) included a new Chapter 15 that codified the United Nations Commission on International Trade Law (UNCITRAL)Model Law on Cross-Border Insolvency.  Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005); see also United Nations Commission on International Trade Law (UNCITRAL), Cross-Border Insolvency: Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, U.N. Doc. A/CN.9/442 (Dec. 19, 1997) (“Model Law”), available at http://www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf.  Chapter 15, among other purposes, promotes cooperation and efficient administration for international insolvency proceedings.  See H.R. Rep. No. 109-31 at 105 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 169.  Chapter 15 expressly encourages cooperation and communication between courts hearing insolvency cases across borders, and courts should exercise their discretion to provide relief to foreign liquidators with that call for comity in mind.  See 11 U.S.C. § 1525; Allan L. Gropper, Current Devs. in Int’l Insolvency Law: A United States Perspective, 15 J. Bankr. L. & Prac. 2, Art. 3, at 3–5 (Apr. 2006).  Chapter 15 also provides that “[i]n interpreting this chapter, the court shall consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions.”  11 U.S.C. § 1508.

Those principles have informed how courts have applied Chapter 15 in cases where foreign liquidators seek to apply avoidance powers like those involving preferential or fraudulent transfers, and are a necessary background to keep in mind for any party litigating avoidance-power issues involving foreign insolvencies.

Recognition of a Foreign Proceeding

Before foreign liquidators can attempt to avoid preferential or fraudulent transactions, they must first obtain approval to appear in U.S. bankruptcy courts.  Chapter 15 provides the mechanism for that approval.  The representative of a foreign debtor may file a petition in a U.S. bankruptcy court to seek “recognition” of a “foreign proceeding.”  11 U.S.C. § 1515(a).  A “foreign proceeding” is “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.”  11 U.S.C. § 101(23).  A foreign proceeding may be either a “main” proceeding, which is pending where the debtor’s “center of main interest” (“COMI”) lies; or a “nonmain” proceeding pending away from the debtor’s COMI but where the debtor at least has an “establishment.”  11 U.S.C. § 1502(3)–(5); 11 U.S.C. § 1502(a), (b). 

Relief Available After Seeking Recognition

Upon recognition, what can a foreign representative do to protect the estate’s assets?  And do those powers include avoidance powers?

Automatic Relief Available after a Foreign Main Proceeding is Recognized

First, when a court recognizes a foreign main proceeding certain provisions become automatically applicable.  11 U.S.C. § 1520(a).  Those provisions are Sections 361 (“Adequate protection”), 362 (“Automatic stay”), 363 (“Use, sale or lease of property”), 549 (“Postpetition transactions”) and 552 (“Postpetition effect of security interest”).  That familiar list of provisions shows that the purpose of Section 1120(a) is to preserve the debtor’s U.S. property upon recognition of a foreign main proceeding.  Avoidance powers related to prepetition transfers, however, are not included in that list of automatically applicable provisions.

Permissive Relief Available at the Court’s Discretion

Second, “permissive” relief is also available, at the court’s discretion, if a court recognizes a foreign main or nonmain proceeding.  11 U.S.C. § 1521(a), (b).  That permissive, discretionary power is quite broad.  The permissive relief specifically enumerated in Section 1521(a)(1)–(7) of the statute is illustrative of “any appropriate relief” that a court may provide at the request of the foreign representative, see 11 U.S.C. § 1521(a) (emphasis added), and the use of the word “including” to set off those specific provisions is not meant to exclude other, unenumerated options for relief, see 11 U.S.C. § 102(3).  With that in mind, one commentator has described Section 1521 as “a broad reservoir of equitable power[.]”  Leif M. Clark, Ancillary and Other Cross-Border Insolvency Cases Under Chapter 15 of the Bankruptcy Code, § 7[2], p. 70 (2008).  Another commentator agrees that “Section 1521 relief is intentionally extremely broad.  It enables a court to empower a foreign representative to exercise many of the powers of a trustee or debtor-in-possession, even if those powers are not available to the representative under foreign law.”  Alesia Ranney-Marinelli, Overview of Chapter 15 Ancillary and Other Cross-Border Cases, 82 Am. Bankr. L.J. 269, 313 (2008).

But as broad as the court’s discretionary powers are under 11 U.S.C. § 1521, there is a key limitation that affects the question at issue here: Section 1521(a)(7) prohibits a foreign representative from pursuing avoidance claims.  In particular the court may grant “additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).”  11 U.S.C. § 1521(a)(7).  Those excepted provisions include those allowing for the avoidance of preferential or fraudulent transfers.  See 11 U.S.C. §§ 522 (“Exemptions”); 544 (“Trustee as lien creditor and as successor to certain creditors and purchasers”); 545 (“Statutory liens”); 547 (“Preferences”); 548 (“Fraudulent transfers and obligations”); 550 (“Liability of transferee of avoided transfer”); 724 (“Treatment of certain liens”).

There is an option remaining, however—albeit a potentially cumbersome one.  Section 1523(a) allows a foreign representative “to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)” in cases “concerning the debtor pending under another chapter of this title[.]” 11 U.S.C. §§ 103(a); 1523(a).  In other words, the foreign representative can file a full Chapter 7 or Chapter 11 case involving assets in the United States, rather than merely invoking Chapter 15’s powers, and in that case can pursue the avoidance provisions in the bankruptcy code.

Finally, while Chapter 15 also allows the court to grant “additional assistance” to the foreign representative, that relief is still “subject to the specific limitations stated elsewhere in this chapter” and therefore cannot circumvent the prohibition on the U.S. statutory avoidance powers outside of a separate Chapter 7 or Chapter 11 case.  11 U.S.C. § 1507; see also In re Atlas Shipping A/S, 404 B.R. 726, 741 & n. 11 (Bankr. S.D.N.Y. 2009).  Moreover, courts often simply conflate the “additional assistance” under Section 1507 and the “appropriate relief” under Section 1521 that foreign debtors may seek.  See, e.g., Vitro, S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro, S.A.B. de C.V.), 455 B.R. 571, 573, 579 (Bankr. N.D. Tex. 2011); In re Fairfield Sentry Ltd., 452 B.R. 52, 54, (Bankr. S.D.N.Y. 2011).

With the above three categories of powers in mind, the question arises: Why exclude most bankruptcy code avoidance provisions from the permissive relief that a court can grant upon recognition?  Notably, the Model Law on which Chapter 15 is based does not contain that limitation.  See Model Law, Art. 21(g).  Moreover, another provision in the Model Law suggests that avoidance actions would generally be available upon recognition.  See id. at Art. 23 (“Upon recognition of a foreign proceeding, the foreign representative has standing to initiate [refer to the types of actions to avoid or otherwise render ineffective acts detrimental to creditors that are available in this State to a person or body administering a reorganization or liquidation]”) (bracketing and italics in original).

At least one court has concluded that concern about forum-shopping to the U.S. for more powerful avoidance powers motivated the drafters of Chapter 15, thus triggering the decision to relegate the use of those U.S. powers only to those cases in which there were U.S. assets and the foreign representative filed a full Chapter 7 or Chapter 11 case.  See Fogerty v. Petroquest Resources, Inc. (In re Condor Ins. Ltd.), 601 F.3d 319, 326–27 (5th Cir. 2010).  In such cases, the U.S. court can apply choice-of-law principles to decide whether U.S. law or foreign law applies.  See id.  One commentator has further explained that “[t]he notion is that a foreign representative should not be able to avail himself or herself of the substantial rights created under these provisions, rights which in many respects contravene non-bankruptcy law entitlements, in service to a foreign insolvency scheme that may itself lack such powers.”  See Clark, supra, § 3[5], p. 26. 

As discussed below, that principle of respect for foreign legal regimes, which usually have different approaches to avoidance, can inform how courts have considered requests to apply avoidance powers in U.S. cases involving foreign liquidations.  The following sections discuss some of those court opinions and identify possible pitfalls and potential strategies that counsel for foreign liquidators should know about when seeking to invoke various avoidance powers.

Pitfalls and Opportunities Related to Seeking Relief Under Section 549

The first major avoidance power to consider—at least when a court has recognized a foreign main proceeding—is the ability to avoid postpetition transfers under Section 549.  A number of important issues exist related to those Section 549 postpetition avoidance powers: (1) what actions the foreign liquidator must take, (2) what remedies are available if transfers are avoided, and (3) which transfers count as postpetition transfers.

First, although Section 1520(a)(2) makes Section 549 automatically applicable upon recognition, the foreign liquidator must still take action to avoid postpetition transactions.  Section 549, after all, states that a trustee “may avoid” a postpetition transaction—not that such a transaction is automatically void.  See 11 U.S.C. § 549(a).  One court went further and required the representative to begin an adversary proceeding in order for the foreign liquidator to avoid an unauthorized transaction under Section 549, rather than allowing the representative to sell the property at issue pursuant to a Section 363 Motion to Sell.  See In re Loy, No. 07–51040–SCS, 2008 WL 906503 at *6 (Bankr. E.D. Va. Apr. 3, 2008). 

Perhaps surprisingly, the need for the representative of a foreign liquidator to take affirmative action to restore property from postpetition unauthorized transfers may well run counter to the purpose of the Model Law, which states that “Upon recognition of a foreign proceeding that is a foreign main proceeding[,] [t]he right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.”  Model Law, Art. 20 § 1(c).  That prohibitive language would appear to make unauthorized postpetition transactions void at the outside, not merely avoidable.  See Clark, supra, § 7[1], p. 67.  That said, the Guide to Enactment to the Model Law recognizes that the Model Law mandates no specific enforcement mechanisms, but also observes that “the main purpose of such sanctions is to facilitate recovery for the insolvency proceeding of any assets improperly transferred by the debtor” and notes a preference for “the setting aside of such transactions[.]”  Model Law, Guide to Enactment, ¶ 147.  Thus, even as courts follow the text of Section 549 and require foreign representatives to take affirmative action to avoid unauthorized postpetition transactions, they should consider the Model Law’s purpose to provide an effective mechanism to “set aside” such transactions.

That purpose helps inform how to handle the second tricky issue related to Section 549: whether a foreign representative can take advantage of Section 549 without relying on Section 550, which, as noted above, is an avoidance power unavailable to foreign representatives outside a full Chapter 7 or Chapter 11 case.  See 11 U.S.C. § 1521(a)(7).  Section 1520(a)(2), which activates Section 549 after a foreign main proceeding is recognized, does not mention Section 550.  See 11 U.S.C. § 1521(a)(2).  That is potentially important because it is Section 550 that allows for the recovery the property, or the value of the property, after a postpetition transfer of that property is avoided under Section 549.  11 U.S.C. § 550.  The bankruptcy court and district court noted that discrepancy in the In re Loy case, but did not resolve it because Section 549 relief was not available for other reasons.  See O’Sullivan v. Loy (In re Loy), 432 B.R. 551, 555 n. 4 (E.D. Va. 2010); 2008 WL 906503 at *22 n. 7.  Counsel should therefore be prepared to argue that, notwithstanding the exclusion of Section 550 from the avoidance powers available upon recognition, Section 1520(a)(2) would be meaningless if courts did not provide some mechanism for foreign representatives to recover postpetition transfers that are avoided under Section 549.

The third major challenge is that Section 549 prohibits postpetition transfers “after the commencement of the case” that are “not authorized under this title or by the court.” 11 U.S.C. § 549(a)(1), (2)(B).  When international insolvency is involved, what counts as the “commencement of the case” for purposes of this section?  If the application for recognition is the “commencement of the case” rather than the start of the foreign insolvency proceedings, then there could be U.S. transfers from the debtor’s property that occur after that foreign insolvency begins abroad but before the petition for recognition is granted—or at least before it is filed.

The In re Loy case considered that issue, too.  There, the district court held that “commencement of the case” means the filing of the petition for recognition in a Chapter 15 case, not the underlying foreign insolvency proceeding.  See 432 B.R. at 563.  Although the court’s reasoning appears sound, at least one commentator has argued that the “commencement of the case” should begin when the foreign insolvency begins.  See Cullen Ann Drescher, Introducing the Foreign Gap Debtor and Protecting Good-Faith Transferees: A Proposal for Appropriate Interpretation and Application of § 549 in Transnational Insolvency Cases, 28-Aug Am. Bankr. Inst. J. 58 (July/August 2009).  Regardless of which view is more in line with the statutory purpose of Chapter 15, counsel should be prepared to petition for recognition quickly once an international insolvency begins in order to take full advantage of Section 549.

Avoidance Actions Based on Foreign Law

As discussed above, Chapter 15 prohibits the use of avoidance actions in the bankruptcy code involving prepetition transactions outside a full Chapter 7 or Chapter 11 case.  See 11 U.S.C. § 1521(a)(7).  But there is another option counsel should consider: avoidance actions based on foreign bankruptcy law.  Two cases have staked out ground in this developing area.  The Fifth Circuit Court of Appeals in Fogerty v. Petroquest Resources, Inc. (In re Condor Ins. Ltd.) held that a foreign representative could use Nevis avoidance law in an ancillary Chapter 15 proceeding to seek to claw back over $313 million in fraudulent transfers made to a U.S. entity to avoid the insolvent firm’s creditors, even though the use of U.S. avoidance law was prohibited.  601 F.3d at 320, 329.  In a different Chapter 15 proceeding, the U.S. District Court for the Southern District of New York in In re Fairfield Sentry, Ltd. agreed with In re Condor that foreign avoidance powers are available as “additional relief” in ancillary proceedings, but that those powers could not reach assets outside the U.S.  458 B.R. 665, 682 (S.D.N.Y. 2011).

The In re Condor case sought to apply the principles discussed at the outset of this article in reaching its conclusion that the prohibition on U.S. avoidance powers in Section 1521(a)(7) did not also extend to foreign avoidance powers.  The court reasoned that applying foreign law after the recognition of a foreign insolvency proceeding was fully consistent with Chapter 15’s emphasis on cooperation between U.S. and foreign courts and with other purposes underlying Chapter 15.  Id. at 324.  Forum-shopping and conflicting bodies of law were also not a concern for the court, since the foreign representative was simply attempting to use avoidance powers in the Chapter 15 ancillary proceeding that were no more potent that avoidance powers available in Nevis courts.  Id. at 327.  Finally, the court also stated that its conclusion was consistent with pre-Chapter 15 caselaw applying the now-abrogated Section 304 of the Bankruptcy Code.  Id. at 328-29 (“[U]nder section 304, avoidance actions under foreign law were permitted when foreign law applied and would provide for such relief.”).

The Fifth Circuit’s reasoning will be important to master as counsel for foreign representatives seek to extend the In re Condor rule to other circuits.  Moreover, notwithstanding the emerging judicial consensus to allow foreign avoidance actions in ancillary proceedings, at least one commentator has criticized both In re Condor and In re Fairfield Sentry, and has instead advocated for prohibiting foreign avoidance powers just as U.S. avoidance powers are unavailable in ancillary proceedings.  See Katelyn Trionfetti, Note, The Use of Foreign Avoiding Powers under Section 1521(a)(7) in Chapter 15 Cases, 21 Am. Bankr. Inst. L. Rev. 279 (2013); see also In re Atlas Shipping A/S, 404 B.R. at 744 n. 16 (raising but not deciding the question of whether Section 1521(a)(7)’s exclusion of a trustee’s Section 544 powers was meant to limit the use of foreign law in ancillary proceedings).

Also, although beyond the scope of this article, a foreign representative’s attempt to invoke foreign avoidance powers will require the court in an ancillary proceeding both to understand the content of foreign law and to conduct a choice-of-law analysis to determine whether it can apply.  Counsel will need to be prepared to address these issues. 

Avoidance Actions in Chapter 7 or Chapter 11 Proceedings

If the limited avoidance powers discussed above in ancillary proceedings under Chapter 15 are insufficient, an additional option remains.  Upon recognition, the foreign representative may file a Chapter 7 or Chapter 11 case if the debtor has assets within the United States or assets that are otherwise subject to U.S. bankruptcy jurisdiction.  See 11 U.S.C. §§ 1511(a); 1528.  Then, the foreign representative will have standing to pursue avoidance actions based on the bankruptcy code provisions otherwise excluded in Section 1521(a)(7).  See 11 U.S.C. § 1523(a); In re AJW Offshore, Ltd., 488 B.R. 551, 557 (Bankr. E.D. N.Y. 2013). 

That does not mean that the foreign representative will automatically succeed in invoking avoidance powers in a Chapter 7 or Chapter 11 case: “To be sure, section 1523(a) grants no substantive right of avoidance.  Rather it lifts a potential standing roadblock for resort to Chapters 7 or 11.”  In re Condor Ins. Ltd., 601 F.3d at 323-24.  Even if a foreign representative succeeds in filing a Chapter 7 or Chapter 11 case, the court must still conduct a choice-of-law analysis to determine whether to apply U.S. avoidance law, or another country’s.  Compare French v. Liebmann (In re French), 440 F.3d 145, 148 (4th Cir. 2006), cert. denied, 127 S. Ct. 72 (2006) (Bermuda law required actual intent to defraud for avoidance, but U.S. law did not; U.S. law applied after choice-of-law analysis), with Gitlin v. Société Générale (In re Maxwell Commc’n Corp.), 93 F.3d 1036, 1051-53 (2d Cir. 1996) (fraudulent-transfer avoidance actions against British banks were barred because English avoidance law governed the transactions) (pre-Chapter 15 case).  Counsel should be prepared to brief the court on foreign law, and may need expert testimony on the contents and interpretation of another jurisdiction’s laws.  See Fed. R. Bankr. P. 9017; Fed. R. Civ. P. 44.1.


Three main avenues exist for counsel to “stop the bleeding” on behalf of a foreign representative and limit or claw back unauthorized, preferential, or fraudulent transfers.  If a court recognizes a foreign main proceeding, the foreign representative can avoid prepetition transfers.  If a court recognizes a foreign main or nonmain proceeding, the court may have the discretion to grant the petitioner’s request to apply foreign avoidance powers as “additional relief,” but cannot apply U.S. Bankruptcy Code provisions for avoiding prepetition transfers.  Finally, if those U.S. Bankruptcy Code provisions for avoiding prepetition transfers are important for a foreign representative, then the only remaining option is to file a full Chapter 7 or Chapter 11 case and then seek to bring U.S. avoidance actions.  For all of these options, the ability to persuasively brief foreign-law and choice-of-law issues will be essential to success.

© 2019 Honigman Miller Schwartz and Cohn LLP


About this Author

Jason M Rosenthal Honigman Miller Chicago insurance recovery litigation lawyer
Office Managing Partner, Chicago

Mr. Rosenthal represents businesses in complex litigation with a particular emphasis on insurance recovery litigation and counseling.

  • Authors articles on business litigation topics, as well as articles that discuss the best means to achieve prompt, efficient resolution of lawsuits, and has served as a regular contributor to the CPA Insider
  • Serves as the Chicago Office Managing Partner, and previously served as the Managing Partner of Schopf & Weiss LLP from 2010 to 2015 (prior to the firm merging with Honigman)
Robert Palmersheim Honigman business litigation antitrust, intellectual property

Mr. Palmersheim has a national practice focused on complex business litigation with a particular emphasis on antitrust, intellectual property, fraud, products liability and professional liability. He has represented Fortune 500 corporations, middle market companies and some of the world’s largest law firms.

  • Handles cases and argues appeals in state and federal courts as well as arbitrates cases before the American Arbitration Association, FINRA, and the International Institute for Conflict Prevention and Resolution
  • Currently defending technology and manufacturing corporation against claims for violation Sections 1 and 2 of the Sherman Act, in addition to common law unfair competition claims
  • Defended medical device manufacturer against bid-rigging claims and successfully resolved the lawsuit