Worldwide Application of Automatic Stay in Chapter 15 Is Not Necessarily Automatic

On August 23, 2010, the United States Bankruptcy Court for the Southern District of New York ruled on an issue of first impression under chapter 15 jurisprudence. The foreign representative of JSC BTA Bank ("BTA Bank") filed a motion for contempt and to stay arbitration proceedings against Banque International de Commerce - BRED Paris, succursale de Geneve, Switzerland ("BIC-BRED"). The motion sought to hold BIC-BRED in contempt for willful violation of the automatic stay that came into effect upon entry of the Court's order recognizing BTA Bank's reorganization proceedings in Kazakhstan.

The arbitration proceeding related to BIC-BRED's attempt to collect from JTA Bank on a $20 million loan. After the foreign representative's motion was filed, the Swiss arbitrator entered an award in favor of BIC-BRED and against BTA Bank. As a result, the Court found the motion to stay the arbitration proceedings was moot and limited its decision to the aspects of the motion seeking to hold BIC-BRED in contempt.

In determining whether BIC-BRED should be held in contempt for willfully violating the automatic stay, the Court construed the language of 11 U.S.C. § 1520(a)(1) which reads:

(a) Upon recognition of a foreign proceeding that is a foreign main proceeding – (1) sections 361 and 362 apply with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.

After conducting a thorough analysis of the statutory language, the Court found that a "restrained reading" of section 1520(a)(1) of the Bankruptcy Code is appropriate so as to avoid "absurd consequences," such as the Kazakh court needing permission from the Court before taking any action that might impact BTA Bank. The Court concluded that the "best reading" of section 1520(a)(1) "is that the stay arising in a chapter 15 case upon recognition of a foreign main proceeding applies to the debtor within the United States for all purposes and may extend to the debtor as to proceedings in other jurisdictions for purposes of protecting property of the debtor that is within the territorial jurisdiction of the United States." Because BTA Bank has no assets or employees within the U.S., conducts no business in the U.S., and its only connection to the U.S. is balances in correspondent bank accounts in New York, the Court found the jurisdictional nexus lacking and denied the motion for contempt.

The decision was careful to distinguish the application of the automatic stay in the context of plenary bankruptcies, such as chapter 11 proceedings. In chapter 11 cases, courts have found it necessary to extend the effects of the automatic stay extraterritorially in order to protect the administration of the "worldwide estate". Indeed, in February 2009, in Lyondell Chemical Company's chapter 11 proceedings, another judge from the same Court issued a preliminary injunction restraining parties from commencing involuntary insolvency proceedings in foreign countries against the U.S. debtors' German parent company. In the BTA Bank case, however, the Court found that chapter 11 cases have "no relation to the shared jurisdiction model of a chapter 15 case that is an adjunct to a foreign proceeding." Although the Court acknowledged that a foreign arbitration proceeding that affects property interests of a debtor in the U.S. would be subject to the automatic stay, the arbitration against BTA Bank had no foreseeable impact on U.S. property interests.

The Court's decision is a warning that chapter 15 is not a panacea. As a proceeding "ancillary" to a foreign insolvency proceeding, a chapter 15 proceeding is available to provide limited relief to facilitate the administration of cross-border insolvency proceedings. The automatic stay in a chapter 15 case, therefore, is limited to protect against U.S. proceedings against a foreign debtor and foreseeable impacts on any property of a foreign debtor in the U.S.