Section 1521(a)(7)’s Restrictions Found Inapplicable to State Law Fraudulent Conveyance Actions

On March 23, 2017, the U.S. Bankruptcy Court for the Southern District of Florida (the “Court”) issued an opinion in the chapter 15 case of Banco Cruzeiro do Sul, S.A., a Brazilian bank (“BCSUL” or the “Debtor”), holding, among other things, that section 1521(a)(7) of the Bankruptcy Code does not prevent foreign representatives from commencing state law fraudulent conveyance actions.  See Laspro Consultores LTDA v. Alinia Corp. (In re Massa Falida Do Banco Cruzeiro Do Sul S.A.), No. 14-22974-BKC-LMI, Adv. Pro. No. 16-01315-LMI, 2017 WL 1102814 (Bankr. S.D. Fla. Mar. 23, 2017) (hereinafter, “Laspro”).  The opinion arose in the context of a motion to dismiss the complaint in an adversary proceeding commenced by Laspro Consultores LTDA, Trustee of BCSUL (“Plaintiff” or the “Foreign Representative”) against Alinia Corporation (“Alinia”) and 110 CPS, Inc. (“CPS” and together with Alinia, the “Defendants”).  See id., at *1.

The Foreign Proceeding and the Chapter 15 Case

In September 2012 BCSUL was placed into extra judicial liquidation by the Central Bank of Brazil.  Laspro, 2017 WL 1102814, at *1.  On June 14, 2014, BCSUL filed a petition in the Court for recognition of the Brazilian liquidation proceeding as a foreign main proceeding under sections 1515 and 1517 of the Bankruptcy Code.  See id., at *2.  On July 14, 2014, the Court entered an order recognizing the Brazilian liquidation proceeding as a “foreign main proceeding.”  Id.  On August 12, 2015, the Brazilian bankruptcy court decreed BCSUL bankrupt.  Id.  As of January 21, 2016, Plaintiff was the sole trustee of BCSUL’s estate.  Id.

The Adversary Complaint

On July 8, 2016, Plaintiff filed a complaint (as amended, the “Complaint”) in the Court based on allegations that Luis Felippe Indio da Costa (“Felippe”) and Luis Octavio Indio da Costa (“Octavio”), members of the family involved in BCSUL’s management, orchestrated a fraudulent loan scheme in which funds from BCSUCL were diverted to the Defendants.  Laspro, 2017 WL 1102814, at *2.  Felippe is alleged to be the settlor and sole beneficiary of the trust that owns Alinia.  Id.  CPS is owned by a Brazlian entity that is alleged to be jointly owned by Felippe and Octavio.  Id.  The Complaint alleges, among other things, that the diverted funds were used to purchase two apartments in New York City and certain artwork located therein, that allegedly were then transferred to the Defendants.  Id.  The counts in the Complaint fall into four basic categories: (i) imposition of a constructive trust/equitable lien; (ii) fraudulent conveyance under New York law; (iii) aiding and abetting; and (iv) four separate Brazlian law claims regarding consumer protection, misappropriation, unjust enrichment and fraudulent collusion.  Id., at *2*-3; see also Laspro, Docket No. 25.

The Motion to Dismiss

On October 26, 2016, Defendants filed a motion dismiss all counts of the Complaint arguing, among other things, that section 1521(a)(7) of the Bankruptcy Code precludes the Foreign Representative from bringing the state fraudulent conveyance counts because they were akin to “avoidance actions” under the Bankruptcy Code which the Foreign Representative did not have standing to prosecute.  Laspro, 2017 WL 1102814, at *3.  Section 1521(a)(7) of the Bankruptcy Code states that “[u]pon recognition of a foreign proceeding . . . the court may, at the request of the foreign representative, grant . . . any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)” of the Bankruptcy Code.  11 U.S.C. § 1521(a)(7).

The Court’s Holding

The Court relied on the explicit language of sections 1509 and 1521(a)(7) of the Bankruptcy Code to deny the motion to dismiss with respect to the state fraudulent conveyance claims.  Laspro, 2017 WL 1102814, at *6.  Specifically, although the Court acknowledged that section 1521(a)(7) does preclude a court from granting a foreign representative relief under “certain enumerated sections pursuant to which a bankruptcy trustee may bring avoidance actions,” it found that same section to “not prohibit a foreign representative from bringing avoidance claims that are available to the foreign representative generally under non-bankruptcy law.”  Id.  Moreover, the Court pointed to section 1509(f) of the Bankruptcy Code, which “makes clear” that “the failure of a foreign representative to commence a case or to obtain recognition under [chapter 15] does not affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor.”  Id.; see also 11 U.S.C. § 1507(f).  Accordingly, the Court found that the Foreign Representative’s ability to seek relief under the New York state fraudulent conveyance laws stemmed not from its capacity as a “foreign representative” under chapter 15 of the Bankruptcy Code, but its capacity as the Brazilian bankruptcy judicial administrator “who represents the creditors of the estate under Brazilian law.”  Laspro, 2017 WL 1102814, at *6, *9; see also id., at *7 (“There is absolutely nothing in any part of chapter 15 that remotely suggests that a foreign representative may never bring an avoidance claim that the foreign representative has the direct right to bring in his or her capacity as the foreign representative (or as section 1509(f) makes clear — in his or her independent capacity otherwise).”).  For these same reasons, the Court also denied the motion to dismiss as to the constructive trust/equitable lien claims.  Id., at *9.

Conclusion

In light of the foregoing, it behooves foreign representatives to carefully analyze the nature of each cause of action they might be able to bring in a chapter 15 proceeding.