3. An Overview of the Entry and Effect of an Order of Recognition

Once the application for recognition is filed, the matter must be considered and decided by the United States court "at the earliest possible time"*(132). In other words, these matters should be attended to swiftly to streamline international cooperation and facilitation of the insolvency case.

The burden of proof is on the foreign representative to show that the requirements of recognition under 11 U.S.C. § 1515 have been met*(133). Courts must conduct an independent jurisdictional analysis of the facts of each case before granting recognition under Chapter 15, whether or not an objection to the application for recognition is filed*(134).

Once the court recognizes the foreign proceeding and the "gateway" to the United States has been opened, several doors become accessible. These subsequent doors and ensuing pathways include various rights and opportunities acting through and exclusively in Chapter 15, or by and through filing further bankruptcy cases under Title 11. For example:

A foreign representative can participate as a party in interest in any bankruptcy case and insolvency proceeding under Title 11*(135).

Subject to certain limitations, the court, itself, "may provide additional assistance to a foreign representative under this title or under the laws of the United States"*(136).

A foreign representative, subject to certain limitations, can sue or be sued in any court in the United States*(137).

A foreign representative can bring an involuntary or voluntary bankruptcy case under Title 11*(138).

A foreign representative can seek orders of a court staying executions against a debtor's assets and entrusting assets to a person such as an examiner*(139).

Thus, the foreign representative of a recognized foreign proceeding is equipped with a full and diverse bundle of legal rights and opportunities. However, there are some important qualifications and limitations on these powers.

First - and of paramount importance - nothing in Chapter 15 prevents a United States court from refusing to take action if the court determines such action is "manifestly" contrary to the public policy of the United States*(140). Anything found to be "manifestly" against the public policy of the United States is not permitted. The public policy exception under 11 U.S.C. § 1506 has been described by courts as a " 'safety valve,' which provides a basis 'for imposing specific protections' for creditors in Chapter 15 proceedings"*(141).

This "public policy" exception, however, should be construed more narrowly in an international context than in a purely domestic context*(142). One court noted the dichotomy:

Congress, in regulating cross-border insolvencies, must balance often divergent interests, including those of foreign creditors and those of domestic creditors. On one side of the equation is the need to prevent debtors from taking unfair advantage of foreign creditors by transferring property interests that rightfully belong to the foreign bankruptcy estate. On the other side of the equation is the desire to protect local creditors and purchasers, who may or may not be aware of the foreign insolvency proceeding and its ramifications. And of great importance to all parties is an orderly bankruptcy process that is efficient, predictable, and unencumbered by extended delays*(143).

An action must be "manifestly" contrary to the public policy of the United States-not just contrary to the public policy of the United States*(144). The "public policy" exception should only "be invoked under exceptional circumstances concerning matters of fundamental importance for the enacting State"*(145).

If a court determines that the "public policy" exception is valid and the court declines to recognize the foreign proceeding, the court may then issue any appropriate order to prevent the foreign representative from obtaining comity or cooperation from any court in the United States*(146). This "public policy" exception of 11 U.S.C. § 1506 is not just limited to the "recognition" decision; the Bankruptcy Code does not proscribe its use elsewhere. It applies to any other type of decision to be made by the court regarding a case under Chapter 15.

In Inre Qimonda AG Bankr. Litig.*(147), the court recognized guidelines used by courts analyzing whether a case is manifestly contrary to the public policy of the United States under 11 U.S.C. § 1506. These are:

(1) The mere fact of conflict between foreign law and U.S. law, absent other considerations, is insufficient to support the invocation of the public policy exception.

(2) Deference to a foreign proceeding should not be afforded in a Chapter 15 proceeding where the procedural fairness of the foreign proceeding is in doubt or cannot be cured by the adoption of additional protections.

(3) An action should not be taken in a Chapter 15 proceeding where taking such action would frustrate a U.S. court's ability to administer the Chapter 15 proceeding and/or would impinge severely a U.S. constitutional or statutory right, particularly if a party continues to enjoy the benefits of the Chapter 15 proceeding*(148).

In Qimonda, the Court stressed that under 11 U.S.C. § 1509(b) (3), "a court in the United States shall grant comity or cooperation to the foreign representative... subject to the caveat that comity shall not be granted when doing so would contravene fundamental U.S. public policy (under 11 U.S.C. § 1506)"*(149). The Court remanded the case to the bankruptcy court, concluding that in granting comity to foreign law, the bankruptcy court failed to consider whether the relief sought violated a fundamental policy of the United States and whether granting comity was precluded as manifestly contrary to public policy of the United States*(150).

In In re Thow*(151), the Court used the public policy exception to deny access to unfiled records of a debtor's deposition to the news media, finding that the relief was against the laws of the United States, and specifically the Federal Rules of Civil Procedure, which did not grant public access to unfiled pre-trial discovery documents. The Court observed that "if the rules do confer a right of public access ... debtor's privacy interests and effective administration of estate, including possible recovery of offshore assets, outweighed news media's right to report on proceedings in nature of discovery"*(152).

Another court denied a foreign representative's request to access a Chapter 15 debtor's email accounts stored on two servers in the United States*(153). In Toft, the court found that such relief contravened the United States' public policy and the fundamental principles of protecting the secrecy of electronic communications under the Electronic Communications Privacy Act*(154). The foreign representative could not seek "to exercise in th[e] [United States powers that] go far beyond the powers that have traditionally been afforded to a U.S. estate representative"*(155).

A complete discussion of case law concerning the interpretation and application of "manifestly contrary to the public policy of the United States" under 11 U.S.C. § 1506 is beyond the scope of this article. Needless to say, however, the public policy exception remains of fundamental importance in applications for relief under Chapter 15. And although courts are mostly adhering to a narrow and restrictive application of the public policy exception*(156), it may be a powerful potential obstacle for foreign representatives seeking relief in the United States courts.

A second major issue related to a foreign representative's broad powers is the extent or limits on its request or need for additional, or supplementary, assistance. When requested, a United States court:

shall consider whether such additional assistance, consistent with the principles of comity, will reasonably assure-

(1) just treatment of all holders of claims against or interests in the debtor's property;

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

(3) prevention of preferential or fraudulent dispositions of property of the debtor;

(4) distributions of proceeds of the debtor's property substantially in accordance with the order prescribed by this title; and

(5) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns*(157).

These factors are essentially the same as the factors - in different order of presentation and with distinctive emphasis on "comity" - considered under pre-BAPCPA 11 U.S.C. § 304(c). Once recognition is granted, a court must exercise its discretion consistent with the principles of comity*(158).

A pre-BAPCPA case, In re Victrix*(159), defined comity as a "federal principle," not peculiar to admiralty law, and "pertinent to the enforcement of foreign judgments"*(160). "Comity takes into account the interests of the United States, the interests of the foreign state or states involved, and the mutual interests of the family of nations in just and efficiently functioning rules of international law"*(161).

The court in In re Condor gave full effect to an avoidance action brought by the foreign representative under foreign law, and applied comity principles*(162). The court noted that while avoidance actions under United States law are excluded from a Chapter 15 ancillary proceeding, courts are not prevented from offering avoidance relief under foreign law*(163). The court explained:

Congress did not intend to restrict the powers of the U.S. court to apply the law of the country where the main proceeding pends. Refusing to do so would lend a measure of protection to debtors to hide assets in the United States out of the reach of the foreign jurisdiction, forcing foreign representatives to initiate much more expansive proceedings to recover assets fraudulently conveyed, the scenario Chapter 15 was designed to prevent*(164).

The decision in Condor is consistent with 11 U.S.C. § 1508, which 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[,]"*(165) and perhaps, one of the more expansive applications of comity in the context of Chapter 15.

Comity, however, is not enough to avoid U.S. bankruptcy court review of a sale of assets "within the territorial jurisdiction of the United States"*(166). In Fairfield Sentry, the Second Circuit held that the bankruptcy court must review the sale of an intangible assets owned by a foreign debtor, and could not give deference in the interests of comity to a foreign court that had previously approved the sale*(167). Fairfield was an investment feeder fund for the notorious Ponzi-scheme operated by Bernard L. Madoff Investment Securities, LLC. Once the Ponzi-scheme was uncovered, Fairfield was placed into liquidation in the British Virgin Islands (the "BVI Liquidation"). The liquidator filed a Chapter 15 petition, and the BVI Liquidation was recognized as a foreign main proceeding*(168). Fairfield's claim against Madoff Investment Securities under the Securities Investor Protection Act was sold at auction. The buyer and Fairfield executed an agreement, only to find out three days later that the claim was worth $40 million more than anticipated, due to a settlement obtained in the Madoff liquidation*(169).

Interestingly, the parties' agreement required approval by both the BVI court and the U.S. bankruptcy court*(170). Fairfield, logically, wanted a better sale price than it received at auction, and requested each court to not approve the sale. The BVI court approved the sale - and the U.S. bankruptcy court then declined to review the BVI court's decision under the principles of comity, and because the transaction was outside of the "territorial jurisdiction of the United States" under 11 U.S.C. § 1520(a) (2)*(171). The Second Circuit reversed, finding that the transaction was within U.S. jurisdiction under New York non-bankruptcy law*(172). As a result, the bankruptcy court had to review the transaction under 11 U.S.C. § 363, and could not avoid this requirement under comity principles*(173). Fairfield Sentry shows that Chapter 15 imposes "certain requirements and considerations that act as a brake or limitation on comity," such as sales under 11 U.S.C. § 363*(174). On remand, the Bankruptcy Court for Southern District of New York concluded that the foreign representative had a sound business reason to disapprove the sale, and refused to approve it*(175).

One last example of a court applying the principle of comity - or limits on comity - is In re Atlas Shipping A/S*(176), where the Court vacated maritime attachment liens awarded by United States courts to foreign creditors of the foreign debtor because of some pre-recognition arbitration proceedings. The Court explained:

American courts have long recognized the particular need to extend comity to foreign bankruptcy proceedings. The equitable and orderly distribution of a debtor's property requires assembling all claims against the limited assets in a single proceeding; if all creditors could not be bound, a plan of reorganization would fail. Congress implemented this policy by enacting section 304 as part of the Bankruptcy Reform Act of 1978. This provision allows foreign bankrupts to prevent piecemeal distribution of assets in this country by filing ancillary proceedings in domestic bankruptcy courts. Under general principles of comity as well as the specific provisions of section 304, federal courts will recognize foreign bankruptcy proceedings provided the foreign laws comport with due process and fairly treat claims of local creditors*(177).

The Court stressed that such relief is available only to the extent it "does not prejudice the rights of United States citizens or violate domestic public policy"*(178).