Maximum Comity: Recognition of Foreign Proceedings Under the Bankruptcy Code

Chapter 15 of the U.S. Bankruptcy Code governs cross-border insolvency proceedings. It establishes a comity-based framework within which U.S. courts may recognize certain foreign insolvency proceedings and enforce orders issued in those proceedings. Like other U.S. law on the recognition of foreign proceedings, it includes a public policy exception. This post provides a brief overview of Chapter 15. It then discusses some recent litigation involving the public policy exception triggered by the U.S. Supreme Court’s 2024 decision in Harrington v. Purdue Pharma.

Chapter 15: The Basics

If a debtor has assets and/or creditors in multiple countries, no single bankruptcy court has the power to fully administer its insolvency.  A court administering a plenary proceeding in the debtor’s home country, for instance, lacks jurisdiction to prevent foreign creditors from making claims on the debtor’s assets, or to administer foreign assets of the bankruptcy estate. To do those things, it requires the assistance of foreign courts.

In 1997, the United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law on Cross-Border Insolvency intended to enhance cross-border cooperation and coordination among bankruptcy courts. The Model Law was codified in the United States as a new Chapter 15 of the Bankruptcy Code in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Under Chapter 15, the representative of a qualifying foreign proceeding can petition a U.S. court for recognition. To qualify, the proceeding must be pending in a jurisdiction where the debtor has either its “center of main interests” (COMI) or an establishment. Obtaining recognition is intended to be simple and fast; as long as the foreign petition meets certain procedural requirements, § 1517 mandates recognition. If the foreign proceeding is pending in the country where the debtor has its COMI, it is designated a “main proceeding,” and recognition triggers some immediate effects in the United States—among them, an automatic stay preventing creditors (including U.S. creditors) from enforcing claims against the debtor or its U.S. assets. If the foreign proceeding is pending in another country where the debtor has an establishment, it is designated a “non-main proceeding,” and such relief is available but not automatic.

Once a foreign proceeding—whether main or non-main—has been recognized, the U.S. court is also authorized  to render judicial assistance in support of the foreign proceeding. And when a recognized foreign proceeding results in an approved restructuring plan, the U.S. court will enforce the terms of that plan in the United States (for instance, by ordering the release of a U.S. creditor’s claim against the debtor).

The Public Policy Exception Under Chapter 15

In keeping with the Model Law’s assumption that a court in the debtor’s home jurisdiction is generally best positioned to administer its insolvency, U.S. courts have emphasized the need for great deference under Chapter 15. The statute does, however, include some limiting provisions. First, Section 1522 states that relief can be granted only if the interests of the creditors and other interested entities are sufficiently protected. Second, before providing additional assistance to a foreign proceeding under Section 1507, the court is expected to consider a number of factors, including the protection of U.S. claim holders from prejudice or inconvenience in the foreign proceeding.

Third, the chapter includes a public policy exception. Section 1506 provides that “Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.” This exception is narrowly construed, and public policy challenges are rarely successful.

Recent Litigation

Recent litigation involving a particular form of bankruptcy relief illustrates the depth of Chapter 15’s commitment to international comity and explores the scope of its public policy exception. The story begins not with a cross-border case, though, but with the domestic bankruptcy of Purdue Pharma.

Purdue Pharma, the manufacturer of OxyContin, filed for Chapter 11 bankruptcy in 2019. At the time of filing, the company was defending thousands of lawsuits related to the opioid crisis. The proposed restructuring plan required the Sackler family that owned and controlled Purdue Pharma to pay $4 billion to the bankruptcy estate for distribution to creditors. However, it also granted them a release that would void all opioid-related claims against them, along with an injunction barring claims by future plaintiffs. In other words, the bankruptcy would discharge not only claims against the debtor, Purdue Pharma, but also claims against third parties, the Sacklers.

While a majority of the Purdue creditors who voted on the plan approved it, many—including some opioid claimants—did not. It was nevertheless approved by the bankruptcy court. After objectors filed challenges to the plan, the court’s order to confirm it was vacated by the Southern District of New York. Following some additional modifications to the plan, the Second Circuit Court of Appeals reversed and reinstated the bankruptcy court’s confirmation order. In 2024, the Supreme Court issued a decision rejecting the plan. The Court held that Chapter 11—the section of the U.S. Bankruptcy Code dealing with reorganizations—contained no provisions authorizing U.S. bankruptcy courts to release claims against third parties without the consent of the claimants.

Implications for Cross-Border Cases Under Chapter 15

Some foreign bankruptcy regimes do permit the release of third-party claims on a non-consensual basis. Non-consensual releases may therefore appear in foreign restructuring plans seeking recognition in the United States pursuant to Chapter 15. The Supreme Court’s holding that such releases were not available under U.S. law raised the question whether those plans would be enforced in the United States. In two cases decided earlier this year, U.S. courts concluded that they would—in other words, a court administering an ancillary proceeding under Chapter 15 may order such releases even if a court administering a domestic plenary proceeding under Chapter 11 could not.

The first case, In re Credito Real, involved a concurso plan approved by a Mexican court. The second, In re Odebrecht Engenharia, involved a recuperação judicial proceeding in Brazil. The decisions, from the District of Delaware and the Southern District of New York, respectively, followed similar reasoning.

First, both decisions focused on differences between the language in Chapter 11 and Chapter 15. While the Supreme Court had concluded that Chapter 11 did not authorize the particular form of relief at issue, these courts held that Chapter 15 did: subject to the limits described above, Section 1521 authorizes a court to order “any appropriate relief” in support of a recognized foreign proceeding.  The courts saw “no reason why a jurisdictional limitation on bankruptcy courts acting in plenary cases should hamper courts’ ability to act as ancillaries to foreign proceedings”—emphasizing the “exceedingly broad” discretion courts have to promote the comity-based goals of Chapter 15.

Second, the courts asked whether enforcing foreign releases of that kind would violate U.S. public policy in light of the Supreme Court’s conclusion in Purdue Pharma that U.S. law did not permit non-consensual third-party releases. The courts concluded that it would not. They emphasized the narrowness of the Supreme Court’s ruling, which had framed the issue entirely as one of statutory interpretation. Indeed, the Supreme Court noted that Congress had specifically authorized non-consensual third-party releases in the context of asbestos litigation, and could do so in other contexts if it wished, signaling that such releases were not manifestly contrary to public policy. Both decisions also emphasized once again the restrictive nature of the exception: as the Delaware court stated, “To be manifestly contrary to U.S. public policy, the contested relief must impinge on some constitutional or statutory right.”

Conclusion

In a post last month, John Coyle wrote about a lesser-known federal statute governing the recognition and enforcement of certain foreign forfeiture and confiscation orders. He argued that that statute deserves to be incorporated into the broader story of judgments enforcement in the United States. The same could be said for Chapter 15, which is sometimes overlooked by non-insolvency specialists. Chapter 15 embodies a striking commitment to international comity and plays an important role in enhancing cross-border cooperation and coordination in bankruptcy proceedings.