Insights

In an American Bankruptcy Proceeding, Everything Old Can Be New Again

August 23, 2021Norwegian Law Journal

When forestry firm Norske Skogindustrier ASA and its subsidiaries (“Norske Skog”) filed voluntary petitions for bankruptcy relief in Norway in 2017, it became one of the largest and most complex bankruptcies to have been filed under Norwegian law. At the end of 2018, the trustee for the Norway Bankruptcy filed for relief under Chapter 15 of the United States Bankruptcy Code[1] in order to enable the Norske Skog bankruptcy estate to commence discovery and litigation in the courts of the United States.[2] 

On December 18, 2018, the U.S. Bankruptcy Court for the Southern District of New York granted recognition of the Norwegian bankruptcy as a “foreign main proceeding” under Chapter 15 of the Bankruptcy Code and also permitted the trustee to issue discovery requests, obtain turnover of information, and assert claims of the Norske Skog estate against parties that were subject to jurisdiction in the U.S. [3] On that same day, the trustee filed an adversary complaint in the Bankruptcy Court seeking to undo a complex series of loans and buy-back arrangements aggregating approximately € 30 million against defendants Cyrus Capital Partners, L.P. and GSO Capital Partners LP, along with certain of their respective affiliates.[4] The April 29, 2021 decision issued by Judge Glenn on a motion to dismiss the adversary complaint highlights the intersection of foreign and U.S. bankruptcy law that can occur in a Chapter 15 proceeding.

The adversary complaint contained counts for avoidance under sections 5-5 and 5-9 of the Norwegian Recovery Act of 8 June 1984 No. 59, as well as a claim for damages under section 17-1 of the Norwegian Public Limited Liability Companies Act of 13 June 1997 and similar non-statutory Norwegian law. Norske Skog also pled, in the alternative, unjust enrichment against the defendants. The defendants sought to dismiss the adversary complaint. Although the standard for a motion to dismiss under the Bankruptcy Code is whether the complaint alleges “enough facts to state a claim for relief that is plausible on its face”[5] and, with respect to the allegations of fraud, whether the party has stated with particularity the circumstances constituting fraud,[6] in making those analyses Judge Glenn was required to address issues relating to choice of law, timeliness, and the applicability of Bankruptcy Code Sections 546(e). 

Undertaking a choice of law analysis, Judge Glenn concluded, for the limited purpose of the motion to dismiss, that because there is a conflict between New York’s statute on fraudulent conveyances and Norway’s laws, that the law of the jurisdiction having the “greatest interest in the litigation will be applied”.[7]  Because the fraudulent conveyance statutes at issue were “conduct-regulating” rules, and for those claims where “all or substantially all” of the conduct occurred in Norway, Norwegian law was held to apply, and the claims survived, for now. For those claims where the conduct was found to have occurred in New York, the claims under Norwegian law were dismissed.[8]

Having concluded that Norwegian law was applicable to the motion to dismiss analysis, the Judge was faced with the question of timeliness of the claims. The issue was whether the U.S. Bankruptcy Code’s tolling provision can apply to claims arising under the bankruptcy laws of another jurisdiction. Section 108(a) of the U.S. Bankruptcy Code tolls the statute of limitations for any action under applicable non-bankruptcy law that has not expired prior to the date of the commencement of the bankruptcy. A qualifying claim is tolled to the later of the end of such statute of limitations period (including any suspension of such period occurring on or after the commencement of the case) or two years after the order for relief. Here, the claims asserted against the GSO defendants under the Recovery Act in the December 18, 2018 adversary complaint would have been time barred under the Recovery Act as of that date, meaning had those claims been brought in Norway on the date the adversary complaint was filed, they would have been dismissed.   

While the U.S. Bankruptcy Code and caselaw make clear that Section 108(a) applies in Chapter 15 proceedings,[9] at issue was whether claims arising before the filing of a chapter 15 petition but created by foreign bankruptcy law qualify as “non-bankruptcy law” such that Section 108(a) could apply. Judge Glenn held that, while the claims at issue arose under Norwegian insolvency law, they do not derive their limitations period from the U.S. Bankruptcy Code itself and, therefore, Section 108(a) properly applies to extend the statute of limitations with respect to such claims. In support of this, the court pointed to the goal of section 108(a), which 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.[10] The judge found that the tolling was triggered by the filing of the Chapter 15 petition, and because the Chapter 15 proceeding is distinct from the Norwegian Bankruptcy, the trustee should not lose his non-Bankruptcy Code claims to a foreign limitations period that would have expired after the Chapter 15 proceeding was filed.[11] Accordingly, in a Chapter 15 proceeding, Bankruptcy Code Section 108(a) applies to extend the statute of limitations as to a claim that otherwise might have expired in the foreign proceeding.

The Court, in dicta, also explored the unsettled issue of the scope of the Section 564(e) safe harbor in Chapter 15 proceedings. The Section 564(e) safe harbor prohibits avoidance of transactions in certain instances where there is a qualifying transaction and a qualifying participant.[12] A “qualifying transaction” includes a transfer that is a margin payment or a settlement payment, or that is made in connection with a securities, commodity or forward contract.[13] A “qualifying participant” is a “commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency.”[14] However, Section 546(e) expressly excepts claims under Section 548(a)(1)(A), which – generally speaking – involve intentional fraud of the type contemplated under Section 5-9 of the Recovery Act.

Section 546(e) is expressly made applicable to Chapter 15 proceedings by Bankruptcy Code Section 561(d), which provides that the section applies in a case under Chapter 15 to limit avoidance powers to the same extent as in a proceeding under chapter 7 or chapter 11 of Title 11 of the United States Code; however, Section 1521(a)(7) expressly prohibits a foreign representative under Chapter 15 from asserting a claim under Section 548(a)(1)(A). The Court found that these statutory provisions taken together lead to one of two readings – either Section 1521(a)(7) prevents a chapter 15 foreign representative from making a claim under Section 548, such that a foreign representative if foreclosed from the only exception to the safe harbor or because Section 561(d) applies Section 546(e) to the same extent as in a proceeding under chapter 7 or 11 of the Bankrutpcy Code, the exception to the safe harbor remains applicable in Chapter 15 despite the prohibition of asserting claims under Section 548(a)(1)(A) in Chapter 15.[15] Judge Glenn opined that, in analyzing the Section 548 issue, it would be erroneous to analogize prior decisions considering state law avoidance claims to foreign law avoidance claims because Section 546(e) preempts state law claims, whereas federal preemption does not apply to foreign law claims.[16] Rather, Judge Glenn indicated that if Congress intended to bar assertion of foreign law avoidance claims in Chapter 15, it “could have said so simply and clearly.”[17] The inquiry, the Court said, “must be a flexible one, taking into account not only the language of the statute but also the broader context of the foreign legal regime, rather than a rigid comparison of the language in the foreign statute and our own.”[18]

In conclusion, the Court dismissed the claims under Section 5-9 of the Recovery Action and the unjust enrichment claim; however, the Court permitted the claims under Section 5-5 of the Recovery Act and Section 17-1 of the Companies Act to survive, and granted the plaintiff leave to amend the complaint with respect to such counts. From a practical perspective, a Chapter 15 proceeding can allow a foreign trustee to keep alive claims that otherwise might become time barred; however, due to the unsettled issue of the applicability of the Section 546(e) exemption, certain fraudulent conveyance claims brought in the U.S. under a foreign insolvency law are at risk of failure.                   


[1] 11 U.S.C. § 1501 et seq.

[2] In re Norske Skogindustrier ASA (Bankr. S.D.N.Y. Case No. 18-13571-mg).

[3] In re Norske Skogindusrier ASA (Doc. No. 12).

[4] The Bankruptcy Estate of Norske Skogindustrier ASA v. Cyrus Capital Partners, L.P., et al. (In re Norske Skogindustrier ASA) (Bankr. S.D.N.Y. Adv. Pro. No. 18-01846-mg).

[5] Federal Rule of Civil Procedure 12(b)(6), made applicable by Federal Rule of Bankruptcy Procedure 7012.

[6] Federal Rule of Civil Procedure 9(b), made applicable by Federal Rule of Bankruptcy Procedure 7009.

[7] CITE

[8] In re Bankruptcy Estate of Norske Skogindustrier ASA, --- B.R. ---, at --- (2021); 2021 WL 1687903 at *___.

[9] See 11 U.S.C. § 103(a). See also In re Bankruptcy Estate of Norske Skogindustrier ASA, --- B.R. ---, at --- (2021); 2021 WL 1687903 at *15.

[10] See In re Bankruptcy Estate of Norske Skogindustrier ASA, --- B.R. ---, at --- (2021); 2021 WL 1687903 at *17.

[11] See id.

[12] 11 U.S.C. § 546(e) provides, “Notwithstanding sections 544 , 545 , 547 , 548(a)(1)(B) , and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7) , commodity contract, as defined in section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.” (emphasis added).

[13] 11 U.S.C. § 546(e).

[14] Id.

[15] See In re Bankruptcy Estate of Norske Skogindustrier ASA, --- B.R. ---, at --- (2021); 2021 WL 1687903 at *34.

[16] See id. at 35.

[17] See id.