AS APPEARED IN INTERNATIONAL RESTRUCTURING NEWSWIRE, JANUARY 2014
RECOGNITION AFFIRMED IN FIRST
CHAPTER 15 CASE CONSIDERED
BY THE THIRD CIRCUIT
By Eric Daucher
On August 27, 2013, the United States Court of Appeals for the Third Circuit affirmed the chapter 15 recognition
of ABC Learning Centres’ Australian liquidation proceedings. The primary issue before the court was whether
the existence of ABC’s concurrent receivership proceedings in Australia, which would not have been eligible for
chapter 15 recognition, should prevent chapter 15 recognition for the liquidation proceedings or limit the relief
available upon recognition. The Third Circuit ruled in favor of ABC’s liquidators, holding that chapter 15 recognition of a foreign proceeding should not be denied, nor the resulting relief limited, because of the existence of a
concurrent proceeding that controlled substantially all of the foreign debtor’s assets and that would not itself
have been eligible for recognition. The Third Circuit’s ruling sends a clear message that chapter 15 relief remains
broadly available to ensure that a foreign debtor’s assets will be distributed in accordance with the priorities
established by the applicable foreign law.
Chadbourne & Parke represented ABC’s liquidators in their
chapter 15 cases, including in the successful appeal to the
Third Circuit.
Introduction to Chapter 15
Unlike the Bankruptcy Code’s “plenary” chapters, such
as chapter 7, 9 or 11, chapter 15 of the Bankruptcy Code
deals with bankruptcy cases that are “ancillary” to foreign
bankruptcy, insolvency or debt adjustment proceedings.
Specifically, chapter 15 permits a party who is authorized in
such a “foreign proceeding” to administer the foreign debtor’s
affairs or to act as the proceeding’s “foreign representative”
to request that a US bankruptcy court grant recognition to the
foreign proceeding. If recognition is granted, a wide variety of
relief in furtherance of the proceeding can be obtained from
the US bankruptcy court.
In order to qualify for recognition, a foreign proceeding must: (i) be a proceeding; (ii) that is either judicial or
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administrative; (iii) that is collective in nature; (iv) that is in
a foreign country; (v) that is authorized or conducted under
a law related to insolvency or the adjustment of debts; (vi)
in which the debtor’s assets and affairs are subject to the
control or supervision of a foreign court; and (vii) that is for
the purpose of reorganization or liquidation.
Where a foreign representative seeks recognition of a
foreign proceeding that meets these requirements, and
where certain technical and procedural requirements are
met, recognition is mandatory unless it would be “manifestly
contrary to the public policy of the United States.”
Upon recognition of a foreign main proceeding (which
is a foreign proceeding pending in the country in which
the foreign debtor’s “center of main interests” is located),
section 1520 of the Bankruptcy Code provides certain relief
as a matter of right, including application of the Bankruptcy
Code’s automatic stay with respect to the debtor and its US
property.
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ABC’s Australian Insolvency Proceedings
Prior to their insolvency, ABC Learning Centres and its subsidiaries operated one of the largest childcare center businesses in the world, with locations in Australia, New Zealand,
the United States and elsewhere. However, by late 2008, the
company was in dire financial straits and faced enormous
projected losses. As a result, ABC’s directors voted to place
the company into voluntary administration proceedings in
Australia. This decision resulted in the appointment of independent administrators for the company who needed to
decide whether the company should be liquidated or reorganized. When the administrators and ABC’s creditors subsequently determined that the company should be liquidated,
the administration proceedings were converted to liquidation
proceedings and the administrators were appointed as ABC’s
“Liquidators.” The Liquidators were tasked with, among other
things, ensuring that ABC’s assets were distributed to the
company’s creditor body as a whole, in accordance with the
priority scheme established by Australian law.
Commencement of the voluntary administration proceedings, however, constituted a default under ABC’s loan agreements with its syndicate of secured lenders. Under Australian
law and ABC’s loan documents, that default entitled the
lending syndicate to appoint receivers to take control of the
assets subject to their “charges” (i.e., their liens or security interests) and to realize upon those assets for the benefit of the
secured lenders. The secured lenders exercised this right and
appointed “Receivers” to operate in parallel with the liquidation proceedings. Because the syndicate’s charges covered
substantially all of ABC’s assets, the Receivers essentially took
control of the business and became responsible for recovering
the great majority of the company’s assets.
US Litigation and the Path to Chapter 15
In May 2010, and while ABC was subject to its Australian liquidation proceedings, RCS Capital Development, LLC, a USbased company, won a $47 million dollar jury verdict against
ABC in a breach of contract action in Arizona state court.
Although the Receivers and Liquidators were in some respects
adverse in Australia, they had a common interest in preventing an individual unsecured creditor such as RCS from seizing
ABC’s US assets. Accordingly, Chadbourne was retained by the
Liquidators to seek chapter 15 recognition of the liquidation
proceedings, with the goal of obtaining an automatic stay
that would prevent RCS from seizing any of ABC’s US assets
(including assets controlled by the Receivers). On May 26,
2010, Chadbourne filed chapter 15 petitions with the United
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States Bankruptcy Court for the District of Delaware. The
bankruptcy court immediately entered a temporary restraining order prohibiting further action against ABC or its assets
in the US pending a decision on whether chapter 15 recognition of the liquidation proceedings was appropriate.
The Bankruptcy Court Grants Chapter 15
Recognition to the Liquidation Proceedings
RCS opposed chapter 15 recognition of the liquidation proceedings, arguing, among other things, that the liquidation
proceedings did not constitute “collective” proceedings entitled to recognition. To qualify as “collective,” a proceeding
must be for the benefit of creditors generally, rather than a
single creditor constituency. RCS argued that although the
liquidation proceedings themselves nominally benefited all of
ABC’s creditors, the non-collective receivership proceedings
(which benefited only the secured lending syndicate) “dominated” the liquidation proceedings because the Receivers controlled substantially all of ABC’s assets. The bankruptcy court
rejected RCS’s arguments, finding that the liquidation proceedings and receivership proceedings served separate functions under Australian law and that the liquidation proceedings met all the criteria for chapter 15 recognition, including
collectivity. As a result, the bankruptcy court granted chapter
15 recognition to the liquidation proceedings as foreign main
proceedings, which gave rise to an automatic stay protecting
ABC and all of its US assets, without any carve-out for assets
under the control of the Receivers.
RCS appealed to the United States District Court for the
District of Delaware, which affirmed the bankruptcy court’s
ruling.
The Third Circuit Finds Chapter 15 Recognition
Appropriate Even Where Assets Fully Encumbered
On appeal to the Third Circuit, RCS again argued that recognition should have been denied because ABC’s US assets — the
only assets which stood to benefit from chapter 15’s automatic
stay — were fully encumbered by the secured creditors’ charges
and were under the control of the Receivers. The Third Circuit,
however, was not swayed by this argument, finding that the existence of the concurrent receivership proceedings had no effect
on the straightforward question of whether the liquidation proceedings met the statutory requirements for recognition. As
the Third Circuit explained, the text of “chapter 15 makes no exceptions when a debtor’s assets are fully leveraged.” The Third
Circuit also warned that judicially creating “such an exception
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could contravene the stated purpose of chapter 15 and the
mandatory language of chapter 15 recognition.”
RCS further argued that recognition should be denied
because permitting ABC’s secured creditors to receive the
benefits of chapter 15 recognition would be manifestly contrary to the public policy of the United States. The Third Circuit
rejected this argument as well, noting that the public policy
exception to chapter 15 recognition should be applied only
when the most fundamental policies of the United States are
jeopardized. (For a broader discussion of how the public policy
exception to chapter 15 recognition and relief has previously
been interpreted, see “Important 2011 Rulings on Foreign
Proceedings,” International Restructuring NewsWire, February
2012.) Despite RCS’s arguments, the Third Circuit found that
recognition of the liquidation proceedings furthered, rather
than undermined, US public policy by ensuring an orderly distribution of ABC’s assets.
As the court observed, RCS opposed chapter 15 recognition because the resulting automatic stay prevented it,
as an unsecured judgment creditor, from seizing ABC’s US
assets. chapter 15 recognition of the liquidation proceedings,
however, ensured that the proceeds of ABC’s US assets would
be distributed to creditors in accordance with Australia’s debt
priority scheme, which, like the US law, prioritizes recoveries
for secured creditors. In contrast, “[w]ithout chapter 15 recognition, RCS could skip ahead of the priorities of secured creditors.” The Third Circuit concluded that such a result would
“eviscerate the orderly liquidation proceeding” and contravene the US policy of providing for an orderly distribution of
assets to creditors. Accordingly, the Third Circuit found that
recognition of the liquidation proceedings as foreign main
proceedings was proper.
The Third Circuit Confirms
Applicability of Automatic Stay
Having determined that the liquidation proceedings were
properly granted chapter 15 recognition, the Third Circuit
turned to the question of whether the resulting automatic
stay should protect all of ABC’s US property, or whether it
should have been limited to property under the control of
the Liquidators. chapter 15’s statutory language states simply
that the automatic stay is to be extended to “the debtor and
property of the debtor that is within the territorial jurisdiction of the United States,” and does not restrict the stay to
unencumbered assets. Nevertheless, RCS argued that fullyleveraged property controlled by the Receivers should not
be entitled to the protection of the stay, asserting that ABC
lacked any true interest in such property.
The Third Circuit rejected this final attack, finding that RCS’s
assertions were incorrect and that ABC retained an interest in
its fully-leveraged property that was worthy of being protected by the stay. As an example, the court observed that both
US and Australian law provided ABC with the right to redeem
property held by the Receivers by satisfying the secured creditors’ claims. Ultimately, the Third Circuit concluded that ABC’s
interest in its fully-leveraged property would not be extinguished until the Receivers actually sold the encumbered property to satisfy ABC’s debts to its secured creditors. As a result,
the Third Circuit concluded that the stay properly protected
fully-leveraged assets under the control of the Receivers and affirmed the bankruptcy court’s recognition orders.
Takeaway Points
The Third Circuit’s decision in In re ABC Learning Centres Ltd.
stands for the proposition that where a chapter 15 petition
meets the technical requirements for recognition established by the Bankruptcy Code, recognition and the relief afforded to a foreign main proceeding upon such recognition
are mandatory in all but the narrowest of circumstances. The
Third Circuit’s decision also reinforces the prevailing view that
chapter 15 recognition and relief should only be limited on
public policy grounds when the most fundamental policies of
the US would be jeopardized. Foreign representatives and international creditors alike should take comfort from the Third
Circuit’s ruling, which signifies that chapter 15 relief remains
broadly available even where foreign insolvency procedures
may differ from US practices in significant respects.
Current Status
On November 25, 2013, RCS filed a petition for a writ of
certiorari with the Supreme Court of the United States requesting review of the Third Circuit’s ruling. The Liquidators,
acting through Chadbourne, have opposed that petition. The
Supreme Court has not yet ruled on the request. 
Eric Daucher is an associate in Chadbourne & Parke’s New
York office in the firm’s bankruptcy and financial restructuring
group.
www.chadbourne.com
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