U.S. Bankruptcy Code Tolling Provision Applies in Chapter 15 Case to Extend Deadlines Under Foreign Bankruptcy Law
In In re Bankr. Est. of Norske Skogindustrier ASA, 2021 WL 1687903 (Bankr. S.D.N.Y. Apr. 29, 2021), the U.S. Bankruptcy Court for the Southern District of New York held that a foreign representative in a case under chapter 15 of the Bankruptcy Code can rely on the Bankruptcy Code's statute of limitations tolling provision to extend the deadline under foreign bankruptcy law to commence avoidance litigation. The decision illustrates the increasing extent to which (now 15-year-old) chapter 15 has become an invaluable resource for the representatives of foreign debtors in cross-border bankruptcy cases.
Tolling of Deadlines in Bankruptcy
Section 108(a) of the Bankruptcy Code essentially establishes a two-year deadline from entry of the bankruptcy "order for relief" for a bankruptcy trustee (or a chapter 11 debtor-in-possession ("DIP")) to commence actions on behalf of the estate, provided that the applicable time period did not expire before the filing of the bankruptcy petition. Section 108(a) provides:
If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of—(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) two years after the order for relief.
11 U.S.C. § 108(a). Limitation periods for causes of action arising under the Bankruptcy Code are not governed by section 108(a) but rather by sections 546(a), 549(d), and 550(e). In addition, section 108(a) does not apply if a statute of limitations has expired prior to entry of the order for relief. See generally Collier on Bankruptcy ¶ 108.02 (16th ed. 2021).
Section 108(b) gives the trustee or DIP 60 days to take actions not covered under section 108(a), such as filing pleadings, demands, notices, or proofs of claim or loss, unless the period for doing the relevant act expires later than 60 days after the date of the order for relief. Finally, section 108(c) extends time periods for commencing or continuing actions in nonbankruptcy courts that are stayed by the automatic stay or certain other complementary provisions of the Bankruptcy Code.
Section 108 was enacted as part of the Bankruptcy Code in 1978. However, when chapter 15 was enacted in 2005 to govern cross-border bankruptcy cases, section 108 was made applicable to chapter 15 cases by section 103(a) of the Bankruptcy Code, which, as amended, provides in relevant part that "chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title, and this chapter, sections 307, 362(n), 555 through 557, and 559 through 562 apply in a case under chapter 15."
Availability of Section 108(a) to Foreign Representatives in Chapter 15 Cases
Section 108(a) expressly refers to a "trustee," which, by operation of section 1107(a), is extended to include a DIP, but does not explicitly include a foreign representative in a chapter 15 case.
However, in In re Fairfield Sentry Ltd., 452 B.R. 52 (Bankr. S.D.N.Y. 2011), the bankruptcy court ruled as a matter of first impression that the tolling provisions of the Bankruptcy Code apply in chapter 15, such that a foreign representative would receive an extension of deadlines in connection with pending and anticipated litigation.
The Fairfield court acknowledged that "there is no dispositive case law addressing whether section 108 is automatically applicable in these chapter 15 cases." Even so, it concluded that the question is "squarely addressed" by section 103(a), which "unambiguously" states that "'this chapter'—chapter one—applies in its entirety." Id. at 57. Moreover, the court wrote, section 108 is a "general provision, which is not restricted to, or excluded from, cases under any specific chapter of the Code."
The court rejected the argument that section 1520(a)(3) of the Bankruptcy Code "provides the exclusive relief that can be transferred from 'trustees' to foreign representatives, without including Section 108." Section 1520(a)(3) gives a foreign representative in a recognized chapter 15 case the power to operate the debtor's business and to exercise the rights and powers of a bankruptcy trustee under sections 363 (governing the use, sale, or lease of estate property) and 552 (governing the enforceability of prepetition liens on property acquired by the estate or the debtor postpetition). "Simply put," the court wrote, "inclusion of Section 108 relief in section 1520 would have been superfluous in light of the plain language of section 103(a) of the Code." Id. at 59.
The court also rejected the argument that the term "trustee" in a chapter 15 case does not include a foreign representative. Section 1502(6) of the Bankruptcy Code provides that "trustee" for the purposes of chapter 15 "includes a trustee, a debtor in possession in a case under any chapter of this title, or a debtor under chapter 9 of this title." The word "includes," the court explained, indicates that the definition is not meant to be exclusive, and foreign representatives "are indistinguishable from trustees with respect to the purpose of Section 108 to provide the entity stepping into the shoes of the debtor additional time to evaluate and preserve a debtor's rights." Id. at 60.
Moreover, the court also held that the chapter 15 recognition date is the date of the "order of relief" for purposes of section 108 and other provisions in or made applicable to chapter 15. Finally, it ruled that even if section 108 were not "a self-executing statute" with respect to chapter 15 cases, a bankruptcy court has the power to grant such relief under sections 1507(a) and 1521(a)(7). Id. at 63. Section 1507(a) authorizes the court, upon recognition of a foreign proceeding and subject to the specific limitations elsewhere in chapter 15, to "provide additional assistance to a foreign representative under this title or under other laws of the United States." Section 1521(a)(7) provides that the relief that may be granted by the court upon recognition of a foreign proceeding under chapter 15 may include "granting any additional relief that may be available to a trustee," with certain exceptions.
In a 2015 restructuring, Norwegian newsprint and paper-products company Norske Skogindustrier ASA ("NSA") exchanged certain of its unsecured notes for cash and exchange notes. NSA also issued €290 million in senior secured notes. NSA subsidiary Norske Skog AS ("Skog") was created as part of a 2015 restructuring to acquire NSA's ownership interests in its operating subsidiaries. Thus, after the 2015 restructuring, NSA's capital structure included the unsecured notes, the exchange notes, and the secured notes (in ascending order of seniority).
NSA restructured again in 2016. The 2016 restructuring involved an exchange of unsecured notes maturing in 2017 for unsecured notes maturing in 2026, "perpetual notes" maturing in 2115, and certain par value write-offs. In addition, NSA refinanced the unsecured notes maturing in 2016 by having Skog issue a €110 million secured facility bond to various entities holding unsecured notes, exchange notes, senior notes, and NSA equity interests (collectively, "defendants"). Skog then upstreamed the proceeds (approximately €100 million) to NSA. The bond was senior to the unsecured notes, the exchange notes, and the secured notes.
After attempts at a third restructuring failed, NSA filed a bankruptcy proceeding in Norway on December 19, 2017. The secured noteholders then enforced their security interests, and all NSA equity was sold in a forced sale. The purchase price in the forced sale failed to provide full recovery for the secured noteholders and left no recovery for exchange noteholders and unsecured noteholders.
On November 16, 2018, the bankruptcy trustee appointed by the Norwegian court ("Norwegian court"), in his capacity as NSA's "foreign representative," filed a petition in the U.S. Bankruptcy Court for the Southern District of New York ("bankruptcy court") seeking recognition of NSA's Norwegian bankruptcy under chapter 15 as a "foreign main proceeding." The bankruptcy court granted recognition of NSA's Norwegian bankruptcy as a foreign main proceeding on December 18, 2018.
On September 6, 2019, NSA's bankruptcy estate (also referred to herein as "NSA") commenced an adversary proceeding in the bankruptcy court seeking to avoid as fraudulent transfers more than €30 million in payments made by NSA to the defendants as part of the 2016 restructuring. According to NSA, the defendants pressured NSA into repurchasing notes held by them, and as a result, NSA and other NSA creditors were harmed. The complaint included causes of action for avoidance of the alleged fraudulent transfers under the Norwegian Recovery Act ("Recovery Act"), for damages under the Norwegian Public Limited Liability Companies Act and Norwegian common law, and for unjust enrichment.
The defendants moved to dismiss. Among other things, they argued that NSA's claims were not timely. Certain of the claims were governed by the Norwegian Limitations Act of 1979, which imposed a three-year limitations period. Other claims under the Recovery Act had to be asserted within either: (i) one year after the commencement of a Norwegian bankruptcy proceeding; or (ii) six months from the time the trustee became aware or should have become aware of the existence of a claim.
NSA argued that section 108(a) of the Bankruptcy Code tolled the relevant limitations period for its avoidance claims because the claims would have been timely when the bankruptcy court first granted recognition in NSA's chapter 15 case. The defendants countered that section 108(a) did not toll the limitation period because the Recovery Act "is part of Norway's bankruptcy regime" and section 108(a) applies only if "applicable nonbankruptcy law … fixes a period within which the debtor must commence an action" (emphasis added).
The Bankruptcy Court's Ruling
The bankruptcy court ruled that section 108(a) applied to NSA's claims against the defendants and rendered them timely. It also held that the defendants' motion to dismiss would be denied at "this stage of the proceeding on timeliness grounds even if section 108(a) [did] not apply."
Initially, U.S. Bankruptcy Judge Martin Glenn explained, in accordance with the express language of section 103, Fairfield, and an extensive catalog of subsequent cases agreeing with it, section 108 applies in a chapter 15 case, and a foreign representative is afforded the benefits of the provision.
However, he wrote, although state law avoidance claims and unjust enrichment claims under New York law are entitled to tolling under section 108(a), "the question remains whether it applies to claims arising under the Recovery Act."
At least one court, Judge Glenn noted, has applied section 108(a) to toll the limitations period for claims arising under foreign bankruptcy law. See Laspro Consultores LTDA v. Alinia Corp. (In re Massa Falida Do Banco Cruzeiro Do Sul S.A.), 567 B.R. 212, 227–29 (Bankr. S.D. Fla. 2017) (holding that section 108(a) applied to toll Brazilian "[c]laims arising under Article 130 of the Bankruptcy and Judicial Reorganization Law").
He agreed with the Laspro court's reasoning, writing:
While the claims arise under the Recovery Act, they do not derive their limitations period from the Bankruptcy Code. The goal of section 108(a) is to allow a trustee to step into the shoes of a debtor and have access to the remedies available to the debtor at the time of filing the petition. The tolling was triggered by the filing of the Chapter 15 Petition. And the chapter 15 proceeding should be considered as distinct from the Norwegian Bankruptcy, such that the Trustee should be afforded an opportunity to file a petition and have the foreign bankruptcy recognized, and not risk losing its non-Bankruptcy Code claims to a foreign limitations period that would have expired after the chapter 15 case was filed.
Norske Skogindustrier, 2021 WL 1687903, at *17.
According to Judge Glenn, the avoidance claims against the defendants arose upon the Norwegian bankruptcy filing date and had not yet expired prior to the chapter 15 petition date. Such claims, he reasoned, would have been timely less than a year later on the date of entry of the recognition order. Thus, because section 108(a) would have extended the limitations period to December 18, 2020, Judge Glenn ruled that NSA's complaint was timely filed. He accordingly denied the defendants' motion to dismiss the avoidance claims as untimely.
Even if section 108(a) did not apply, Judge Glenn noted, dismissal of the claims would not be appropriate because there were material issues of disputed fact, including when the trustee was, or should have been, aware of the existence of the claims.
Notwithstanding his conclusion that NSA's claims were timely under section 108(a), Judge Glenn dismissed two of the complaint's three fraudulent transfer causes of action (with leave to replead) because the complaint failed to plead with particularity the circumstances constituting fraud under the Recovery Act, as required by Rule 9(b) of the Federal Rules of Civil Procedure (as incorporated by Bankruptcy Rule 7009).
Due to the existence of disputed issues of fact, Judge Glenn refused to decide whether the payments made to the defendants were protected from avoidance by the Bankruptcy Code's safe harbor in section 546(e) for certain prepetition transfers made in connection with securities contracts, commodity contracts, or forward contracts. In this regard, he explained that: (i) the safe harbor applies in chapter 15 cases (see 11 U.S.C. § 561(d)); (ii) only intentional fraudulent transfer claims under section 548(a)(1)(A) are excepted from the scope of section 546(e); and (iii) section 1521(a)(7) provides that a foreign representative cannot assert a claim under section 548 (among other provisions).
NSA argued that, because its avoidance claims under the Recovery Act were "sufficiently analogous" to a claim under section 548(a)(1)(A), the claims should fall within the exception to the safe harbor. According to Judge Glenn, a different bankruptcy judge in the Fairfield Sentry chapter 15 case rejected this argument with respect to intentional fraudulent transfer claims under the law of the British Virgin Islands. See Fairfield Sentry Limited v. Theodoor GGC Amsterdam (In re Fairfield Sentry Limited), 2020 WL 7345988 (Bankr. S.D.N.Y. Dec. 14, 2020), reconsideration denied, 2021 WL 771677 (Bankr. S.D.N.Y. Feb. 23, 2021). In that case, the court ruled that foreign law claims, like state law claims that a U.S. bankruptcy trustee could assert through section 544(b)(1), were barred by the safe harbor.
Without deciding the issue in the case before him, Judge Glenn disagreed with the recent Fairfield ruling. "Barring foreign law avoidance claims or imposing an impossibly high standard for the exception to the safe harbor to apply in chapter 15 cases," he wrote, "would mean that there is effectively no exception to the safe harbor in such cases." According to Judge Glenn, this is contrary to the language of section 561(d), which makes section 546(e) applicable "to limit avoidance powers to the same extent as"—that is, not to a broader extent than—"in a proceeding under chapter 7 or 11." Judge Glenn accordingly "decline[ed] to adopt a rigid rule barring foreign law avoidance claims or requiring the foreign statute to use language virtually identical to section 548(a)(1)(A) to except the challenged transaction from the section 546(e) safe harbor."
Judge Glenn denied the motion to dismiss NSA's remaining claims, except for the unjust enrichment claim, which the court concluded did not exist under Norwegian law.
Because Judge Glenn permitted NSA to replead certain of its claims, his decision in Norske Skogindustrier is not the end of the story concerning NSA's efforts to avoid alleged fraudulent transfers to the defendants as part of the company's 2016 restructuring. Nonetheless, the ruling is significant for a number of reasons.
First, it was not too long ago in chapter 15's relatively brief history that U.S. bankruptcy courts were not certain (for a number of reasons) that they even had the power to adjudicate causes of action under foreign bankruptcy laws in a chapter 15 case. Norske Skogindustrier indicates that this is no longer the case, and this is consistent with a bankruptcy court's general powers to adjudicate foreign law claims. Indeed, bankruptcy courts have applied foreign law in a number of contexts. See, e.g., In re Lehman Bros. Holdings Inc., 602 B.R. 564, 592 (Bankr. S.D.N.Y. 2019) (applying English law to interpret an exclusion/exculpatory provision); In re Fah Liquidating Corp., 2019 WL 4034007, at *5–6 (Bankr. D. Del. Aug. 26, 2019) (applying German law to dismiss an unjust-enrichment claim but noting the same result would have occurred under Delaware law); In re B.C.I. Finances Pty Ltd., 583 B.R. 288, 300 (Bankr. S.D.N.Y. 2018) (applying Australian law to determine the "location" of fiduciary duty claims); In re Express One Int'l, Inc., 243 B.R. 290, 294–95 (Bankr. E.D. Tex. 1999) (analyzing whether French law recognizes the parol evidence rule and how it applies).
Judge Glenn's conclusion that tolling under section 108 is available to a foreign representative in a chapter 15 case is not groundbreaking. However, his determination that the provision can be used to extend deadlines for bringing suit under foreign bankruptcy law (as distinguished from nonbankruptcy law) highlights a problem in the wording of section 108 that may not have been anticipated by lawmakers when they enacted chapter 15. This problem should be remedied in keeping with the purpose of the tolling provision.
Finally, and more broadly speaking, Norske Skogindustrier is emblematic of the increasing utilization of chapter 15 by foreign debtors as a valuable tool, among other things, to protect U.S. assets, enforce foreign restructuring plans or related court orders, avoid transfers, seek discovery in pending or anticipated litigation, or preserve causes of action that may otherwise have expired under foreign law.
A version of this article is being published in Lexis Practical Guidance. It has been published here with permission.
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