Business Judgment Standard Applies to Transfer of Assets by Foreign Representatives in Chapter 15 Proceeding

In what the court characterized as an apparent matter of first impression, U.S. Bankruptcy Judge Christopher S. Sontchi of the District of Delaware considered what legal standard applies in a Chapter 15 case to a transfer of assets located in the United States pursuant to a "global" transaction previously approved by another court in a foreign main proceeding. InIn re Elpida Memory , Case No. 12-10947(CSS) (D. Del. Bankr. Nov. 20, 2012), the court held, based upon the plain meaning of the statute and its legislative history, that it must review the transaction to the extent it impacts assets in the United States under the legal standards governing a transfer by a trustee outside the ordinary course of business, i.e., whether the transaction is a sound exercise of the trustee’s business judgment. In so doing, Sontchi rejected the argument of the foreign representatives that, to the extent that the non-U.S. court in the foreign main proceeding authorized the transfer of assets over which it had shared jurisdiction, the U.S. court was required to grant comity to the orders of that court and to approve the application of the foreign representatives without more.

Chapter 15 was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It adopted the substance and much of the text of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law in 1997. The purpose of Chapter 15 and the Model Law on which it was based was to provide a mechanism for dealing with insolvency cases involving debtors, assets, claimants and other parties of interest in more than one country. The express objectives of Chapter 15 are to promote cooperation between the U.S. courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; to establish greater legal certainty for trade and investment; to provide for the fair and efficient administration of cross-border insolvencies that protect the interests of all creditors and other interested entities, including the debtor; to afford protection to and maximization of the value of the debtor’s assets; and to facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.