Tuesday, May 7, 2013

Adversary Proceeding Required for Avoidance of Post-Petition Transfers by Foreign Representative

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing chapter 13 and chapter 7 bankruptcy cases. His office is in Miami at 1221 Brickell Ave., 9th Fl., Miami and may be reached at (305) 891-4055. www.bublicklaw.com  

The court in In re Loy, 2008 WL 906503 (Bkrtcy.E.D.Va.) was presented with the issue of whether chapter 15 authorizes a foreign representative to utilize the provisions of section 549 (a) in the context of a motion to sell free and clear of liens.

In this case, the Debtor transferred certain U.S. real estate to himself and wife as tenants by the entiretires after the order was entered in the creditor's petition in the English Insolvency Proceeding but before the U.S. bankruptcy court recognized the English proceeding as a "foreign main proceeding" under chapter 15. After the recognition under chapter 15, the English foreign representative filed a motion to sell the transferred U.S. real property pursuant to section 363 free and clear of all liens and claims.

As part of the motion to sell, the foreign representative alleged that the transfer of the real estate was void ab initio on various grounds, including that the Debtor did not have authority to transfer the real estate as it was part of the estate of the previously filed English insolvency case. The foreign representative further asserted that neither a case under title 11 nor an adversary proceeding were necessary to achieve the relief sought.

The court viewed the foreign representative's position as asserting either that the English bankruptcy law has extra-territorial effect even before the filing of the petition for recognition under chapter 15 or that 11 U.S.C. section 549 (a) allows the avoidance of transfers of property of the estate that occurred after the commencement of the English case as opposed to the commencement of the chapter 15 proceeding. The Debtor and his wife objected to the motion to sell.

The court noted that section 549 avoidance power is not one of the powers that are expressly excluded from a recognized foreign representative pursuant to 11 U.S.C. section 1521. But the court held that the foreign representative is not able to sell the property pursuant to section 363 in the absence of the avoidance of the deed of the property from the Debtor to himself and his wife as tenants by the entireties. Virginia law provides that property held as tenants by the entirety is not subject to claims of individual creditors of either.

The court held that the foreign representative was not able to avoid the transfer within the context of a motion to sell as the bankruptcy rules require an adversary proceeding to avoid and recover any unauthorized post-petition transfer under section 549. The court also held that to the extent that the foreign representative sought the avoidance of the transfers based on the application of English insolvency law, that Bankruptcy Rule 7001 required the filing of an adversary proceeding as the foreign representative sought declaratory relief or the recovery of property.

The court noted that the issue of whether a foreign representative may rely on the law of the jurisdiction of the foreign main proceeding as to the avoidance of transfer of U.S. property and the procedural mechanism therefore were apparently issues of first impression.