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Leyza Blanco is part of a bankruptcy law trend that is likely to shed its obscurity as multinational companies fight to survive the fallout of the global recession. When the Miami-based GrayRobinson attorney filed a Chapter 15 action on behalf of a Bahamian client in October, it marked only the seventh time in four years such a case had been filed in South Florida. Blanco has been involved with two of them. “A client will seek Chapter 15 recognition because they are a foreign company that has U.S. assets,” she said. “That recognition permits the courts here to provide the equivalent of a bankruptcy stay for the benefit of the foreign companies that own the U.S. assets.” Chapter 15 is relatively new. It emerged in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, in concert with international agreements, to harmonize insolvency cases involving debtors, assets, claimants and other parties in proceedings involving more than one country. It replaced Section 304 of the Bankruptcy Code and even has its own Web site, Chapter15.com. “It’s sort of like the Geneva Convention of bankruptcy,” said Charles Tatelbaum, a partner in Adorno & Yoss‘ Fort Lauderdale, Fla., office. Such uniformity among countries is viewed as essential in a globalized economy. “It’s a global question of how to deal with corporations that span multiple jurisdictions,” said Greg Grossman, a founding shareholder at Astigarraga Davis, who filed the first Chapter 15 case in a South Florida bankrutpcy court in December 2006. “It really took its foothold outside of the U.S. first and was recommended into our bankruptcy system pretty much from abroad.” Grossman said Chapter 15 and its international equivalents offer one main bankruptcy in which parties from all over the world can have their issues adjudicated. “If you have to do it in multiple places and have the same ground covered multiple times, it’s inefficient, and if any area cries out for efficiency, it’s the one where we already know the debtor doesn’t have enough money to pay everybody,” he said. Every dollar spent on an inefficient procedure is a dollar less that you can give to a creditor, he said. BORN OF CHAOS The European Union and an increasing number of other countries now have their own versions of Chapter 15. Prior to Chapter 15, very difficult complex protocols had to be worked out with the bankruptcy courts in the U.S. and the foreign jurisdiction — even Canada’s. “Literally the judge in both cases would get on the phone in open court to work out these protocols on who was going to have jurisdiction over what and which was going to be considered the main proceeding and which was going to be the foreign proceeding and which liquidator in Canada was going to be responsible for doing what,” recalled Brian Gart, a shareholder and bankruptcy attorney with Berger Singerman‘s Fort Lauderdale office. The economic crisis almost immediately put Chapter 15 to the test, with most cases gravitating toward international business centers. “Most of the Chapter 15s that are pending now in the U.S. are in the Southern District of New York for a reason,” explained Gart,. That is “familiarity with the law, and the nexus and connections with the U.S. courts, and creditors having business there.” INTERNATIONAL TRADE But South Florida’s international trade connections suggest Chapter 15 filings are likely to increase here, as well. “We’re seeing more and more foreign insolvency proceedings that are touching the U.S. because of the worldwide economic issues,” Tatelbaum said. “I’m involved in cases in Eastern Europe, and that is starting to be a considered strategy: filing an insolvency proceeding under German or Turkish courts and then coming over here with a 15 to deal with the issues in the U.S.” Individuals as well as corporations can file Chapter 15 in the U.S. In fewer than 20 percent of cases, the filing is involuntary. In a typical case, a foreign entity with U.S. assets filing bankruptcy in its home country appoints a “foreign representative,” whose function is similar to a trustee, and petitions U.S. courts for “Recognition of Foreign Proceeding” under Chapter 15. A U.S. judge must then determine whether to declare the legal proceedings in the other country to be a “foreign main” or “foreign non-main” proceeding. In the former case, that is recognition that the debtor’s center of main interests are located in that country. “The differences and consequences of that finding are extremely important to the debtor in that foreign country, because in a foreign main proceeding, the foreign representative is able to sue and be sued here in the States, to apply directly to the bankruptcy court for relief, and they can get the benefits of the automatic stay and to stop the transfer of assets outside of the U.S.,” Gart said. If for some reason the proceeding is determined to be foreign non-main, “while it’s not as good and extensive, there still is the right to most of the statutory framework and protection for the creditors in the U.S. But instead of being automatic, it’s now discretionary with the court.” Blanco recalls that in her first Chapter 15, she served as the U.S. counsel for the Brazilian airline VRG Linhas Aereas, a creditor owed in excess of $70 million in the Varig Logistica case. Varig Logistica, which filed a Chapter 15 action in Miami in March, handled Brazilian intrastate cargo shipments for FedEx, UPS and DHL, among others. “Its relationship with FedEx meant that its bank account in the U.S. was an important asset that they sought to protect when they filed the 15,” Blanco said. BAHAMIAN INSURER In the British American case, the Bahamian insurer has subsidiaries that own Florida real estate. The company is under “judicial management” in various jurisdictions throughout the Caribbean but is not in liquidation. In this case, she said, the Chapter 15 petition does not seek to protect the real estate assets because they are owned by British American’s subsidiaries. “However, the Chapter 15 filing is a way to start protecting British American and its American assets from the claims of creditors.” British American also has investment funds in the United States, and the fund managers are in Florida. “With a distressed company, you have people rushing to the courthouse just to get a leg up,” Blanco said. Chapter 15 “is a way to even the playing field.” Ron Neiwirth, a bankruptcy attorney and partner with Fowler White Burnett, has filed a case involving insurance company Clico [Bahamas] Ltd. “Clico had a subsidiary that made South Florida real estate investments,” he said. “Clico Enterprises owns Wellington Preserve. It owns 540 acres in Wellington, Fla. — the biggest piece of undeveloped land Wellington has got. The insurance company went broke because they invested 85 percent of their total asset value in South Florida real estate. Now a liquidator has to be in charge of a foreign main proceeding.” The similarities in Blanco’s and Neiwirth’s cases are not coincidental. “Clico Bahamas is actually two or three steps down a corporate family tree that leads up to something called CL Financial in Trinidad,” Neiwirth said. “British American leads up the corporate tree from a different direction to the same end point. In the Caribbean, this is a huge conglomerate.” TWO GROUPS Gart said recent Chapter 15 filings fall into a few main categories: Ponzi scheme cases involving foreign countries but affecting assets and creditors in the U.S., and “market condition” cases in which particular industries are impacted by severe swings in exchange rates or higher business costs — such as the shipping and storage industries, and commodity industries like paper, pulp and lumber. The global financial crisis itself has been a source of some filings; for example, with the banks in financially troubled Iceland. “Icelanders doing business in the U.S. are protecting assets located here,” Gart said, noting that they are making sure creditors in Iceland and the U.S. are not treated differently. Another common use is winding down companies that are insolvent in a foreign proceeding but have foreign operations, as in Blanco’s British American case. “You see these a lot in insurance liquidations and foreign bank liquidations,” said Neiwirth. “In this country, banks can’t go bankrupt. There are systems in place to liquidate insolvent banks separate from the bankruptcy code. Insurance companies don’t go bankrupt for the same reason.” ‘REMARKABLE TOOL’ Chapter 15 has a confirmed fan in attorney Raymond Miller, a shareholder at the Gunster, Yoakley & Stewart‘s Miami office, who laments that it is not as widely used as it could be. “I suspect part of it is a lack of familiarity,” Miller said. “They don’t realize what a wonderful remedy it can be for a foreign liquidator or a foreign appointee of a court. It allows them to keep their standing. It allows them almost all of the powers provided to a Chapter 11 or 7 debtor. The ability to have nationwide discovery, to take the court order from this court recognizing the foreign representative and to be able to march around the United States with that and be vested with the power of a bankruptcy court is a remarkable tool.” It’s necessary to have that kind of global cooperation, he said, “especially with some of the things that have gone on in the last 15 months.” Grossman said Chapter 15 has brought a general consistency and predictability to the system. “It has actual steps about what needs to occur and when it applies,” he said. “It’s code-based so you can look it up and see what the answer is, for the most part.” IMPERFECT SYSTEM The system has been far from perfect, however, and controversies have emerged over how it has been applied. “The American bankruptcy judge is to look for guidance to precedents being developed by all the other countries that have passed this model law,” Grossman said. “It runs very counter to the controversial notion at the U.S. Supreme Court level about whether American courts should ever look to foreign law with respect to making decisions under American statutes. Here’s a specific command by Congress telling a judge to go read what the U.K. judges or the Australian judges are doing. You’ll see judges analyzing case law issued by EU countries.” Still, he notes, that problem could have been worse than has been proven so far. In 95 percent of the cases, everyone is acting consistently, he said. “It’s always the 5 percent that people want to talk about. As uniformity goes, this is really good.” Inconsistencies among court systems, while fewer under Chapter 15, still rise up on occasion. “In Italy, for example, the trustee there communicates directly with the judge,” Miller said. “They don’t have the same restrictions we would have on ex-parte communications. That’s just so foreign to our system that you would be able to have that kind of access. That’s one of the major concerns, and it was under 304, refusing recognition because it came from a jurisdiction where there was not what we would generically label due process.” DISAPPOINTING RESULTS The rulings don’t always please U.S. participants. As the Madoff and Stanford Ponzi schemes have found their way into the Chapter 15 world, a dispute emerged in the Stanford case between a U.S. Securities and Exchange Commission receiver and an Antiguan appointed liquidator, both seeking the same money held in a British bank account. The British judge was called upon and decided the Antiguan had the better claim. The ruling is being appealed. Another ruling involved “a whole batch of litigation over an Italian tile company of all things — they made tile manufacturing machines,” Neiwirth said. “Should money go to a local creditor or the Italian liquidator?” The Italian company won. “With Madoff, there were enough corporations involved directly or indirectly in the Madoff fiasco around the English-speaking world that you will see more of these Chapter 15s being filed,” Grossman said. The chapter has also made cameo appearances in the Lehman Brothers and Bear Stearns debacles. Another controversy has erupted in a Texas Chapter 15 case, where the foreign representative wanted to bring lawsuits against American defendants who received preferential transfers. “Chapter 15 is absolutely explicit in saying the foreign representative, having been recognized in the United States, doesn’t have the power to sue for preferential transfers under the American bankruptcy code,” Grossman said. “What’s controversial is that the Texas court said not only can you not bring preferential transfer claims under the American preference case, you can’t bring them under your home country law.” So, if it was a main bankruptcy in the Bahamas, and the Bahamas had a law that said the people who get paid right before the bankruptcy have to give it back so it can be distributed more equally amongst the creditors, “the Texas court said you can’t bring that case here in connection with your Chapter 15 bankruptcy filing.” Even so, there is a consensus that the benefits of Chapter 15 have outweighed the unintended consequences. “Instead of leaving bankruptcy judges to fly by the seat of their pants on general ideas of international comity and respect for foreign courts, this gives them an actual road map,” Neiwirth said. It’s also given area bankruptcy attorneys some new legal ground to explore. “It’s interesting stuff,” Neiwirth said. “There are so many routine cases. It’s nice to be able to turn your brains on once in awhile.”

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