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Chadbourne Obtains Precedent-Setting Chapter 15 Decision

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Third Circuit Affirms Chapter 15 Recognition of ABC Learning Centres Liquidations

LawFuel.com – Law Firm Newswire – August 29, 2013

 

chadbourne-lawfuelOn August 27, 2013, Chadbourne & Parke prevailed before the US Court of Appeals for the Third Circuit in the first appeal arising from a Chapter 15 bankruptcy case to be considered by that court. The Third Circuit’s decision was a sweeping victory for the Australian liquidators of ABC Learning Centres Ltd, Chadbourne and the state of Chapter 15 law as a whole.

Chapter 15 of the US Bankruptcy Code authorizes a US bankruptcy court to grant recognition to a “foreign proceeding,” which is defined as a “collective judicial or administrative proceeding in a foreign country . . . 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.” Upon recognition of a foreign main proceeding, certain relief is automatically granted, including the imposition of the Bankruptcy Code’s automatic stay with respect to the debtor and its assets within the territorial jurisdiction of the US.

In a nearly 30-page precedential opinion, the Third Circuit found that Chapter 15 recognition of ABC Learning’s Australian liquidation was mandatory, notwithstanding the pendency of a concurrent receivership proceeding, and that the automatic stay that arises upon recognition of a foreign main proceeding extends to all of the foreign debtor’s assets in the US, regardless of whether those assets are fully leveraged or subject to a concurrent proceeding that would not itself be eligible for Chapter 15 recognition.

In late 2008, ABC Learning and a number of its subsidiaries (collectively, ABC), which together operated one of the world’s largest childcare center businesses, was placed into administration in Australia. Thereafter, ABC’s administration proceedings were converted into liquidation proceedings (the Liquidations). Under Australian law an administration or liquidation proceeding—which operates for the benefit of all creditors—can proceed concurrently with a receivership, which operates solely for the benefit of the secured creditors who appoint the receiver. Consequently, contemporaneously with ABC being placed into administration, a syndicate of secured lenders, who were collectively owed approximately AUD$1 billion by ABC, commenced receivership proceedings against the company.

Faced with the prospect that ABC Learning’s unsecured creditors might receive little, if any, recovery in the Liquidations due to ABC’s substantial secured debt, RCS Capital Development, LLC (RCS), a US-based unsecured judgment creditor of ABC Learning, threatened to take “self-help” enforcement actions against ABC’s assets in the US. In order to obtain the protections of the automatic stay in the US and thereby block RCS’s collection actions, ABC’s liquidators retained Chadbourne to file petitions under Chapter 15 of the Bankruptcy Code with the US Bankruptcy Court for the District of Delaware seeking recognition of the Liquidations.

RCS opposed recognition, arguing, among other things, that because of ABC’s concurrent receivership proceedings, which operated only for the benefit of ABC’s secured creditors, and the fully-leveraged state of ABC’s assets, that the Liquidations were a “ruse” that could not satisfy the “collective proceeding” requirement for recognition under Chapter 15. When that argument failed and the bankruptcy court recognized the Liquidations as foreign main proceedings, RCS moved for reconsideration and contended that the scope of the automatic stay should be limited to assets under the control of the Liquidations. The bankruptcy court rejected this argument, and found that the Bankruptcy Code required that the automatic stay be extended to all of a Chapter 15 debtor’s assets in the US, regardless of whether those assets are subject to the foreign proceeding being recognized.

RCS appealed both of the bankruptcy court’s orders, which were summarily affirmed by the US District Court for the District of Delaware on June 18, 2012. RCS then further appealed to the Third Circuit, raising similar arguments regarding the collective nature of the Liquidations and purported limits to the automatic stay.

The Third Circuit rejected RCS’s arguments and concluded that where the statutory requirements for recognition are met, and recognition would not be manifestly contrary to the public policy of the US, Chapter 15 recognition is mandatory. As the court noted, “Chapter 15 makes no exceptions [to mandatory recognition] when a debtor’s assets are fully leveraged.” As a result, the Third Circuit concluded that recognition of a foreign proceeding is not limited by the mere happenstance that, after distributing assets to secured creditors abroad, few if any assets may remain to pay unsecured creditors. As the Third Circuit observed, taking any different approach would “eviscerate” orderly cross-border liquidations and create an unacceptable race to the courthouse in the US.

The Chadbourne team was led by partner Howard Seife and included partner Andrew Rosenblatt and associate Eric Daucher.

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