US Bankruptcy Court dismisses Ch. 15 case, bars foreign representative from appearing before it

February 07, 2023

Chapter 15 of the Bankruptcy Code was enacted to, among other things, foster cooperation between courts of the United States and courts of foreign countries “involved in cross-border insolvency cases.” 11 U.S.C. § 1501(a). In furtherance of this mandate, Section 1518 of the Bankruptcy Code requires a foreign representative to inform the US court of any “substantial change” in the status of the foreign proceeding or the foreign representative’s appointment. The Bankruptcy Code is silent as to the ramifications for failing to provide such a report. However, the United States Bankruptcy Court for the Northern District of Illinois (the “Bankruptcy Court”) recently determined that a foreign representative’s failure to fulfill its duties to the Bankruptcy Court under Section 1518 warranted dismissal of the bankruptcy case and a bar of that foreign representative’s powers to act in matters before the Bankruptcy Court. In re Ace Track Co., Ltd., No. 15bk13819, 2023 WL 551963 (Bankr. N.D. Ill. Jan. 27, 2023).

Ace Track Co. Ltd. (“Debtor”) was a debtor in a rehabilitation proceeding pending in the Republic of Korea (the “Korean Proceeding”). By order of the Changwon District Court bankruptcy division (the “Korean Court”), Sooan Cho (“Foreign Representative”) was authorized to file a Chapter 15 case in the Bankruptcy Court. Upon the Foreign Representative’s request, the Bankruptcy Court entered an order recognizing the Korean Proceeding as a foreign main proceeding. Five years after recognition, counsel for the Foreign Representative filed a motion to withdraw as counsel asserting that there had been no contact with the Foreign Representative and that counsel had been unable to reach him. The Bankruptcy Court, consistent with its authority under Chapter 15, attempted to directly contact the Foreign Representative. Because its efforts proved to be futile, the Bankruptcy Court contacted the Korean Court and learned that the Korean Court had previously approved the Debtor’s restructuring plan and that the Korean Proceeding had been terminated on February 22, 2018. In addition, the Bankruptcy Court learned that the Foreign Representative was removed from his role as receiver for the Debtor on December 19, 2016.

Because the Foreign Representative did not communicate these changes in status with the Bankruptcy Court or the Foreign Representative’s counsel, the Bankruptcy Court issued an “order to show cause,” which is often used in the US to give parties an opportunity to be heard before the court issues a particular ruling. In this instance, the order to show cause required any interested party to appear and show cause why:

  1. The [Chapter 15 case] should not be closed;
  2. [Foreign Representative’s] Counsel should not be relieved from their representation; and
  3. [Foreign Representative] should not be barred from acting as foreign representative in matters before [the Bankruptcy Court] without express prior authorization .

Despite great efforts by the Bankruptcy Court, the Foreign Representative did not appear at the hearing on the Show Cause Order. Therefore, the Bankruptcy Court determined that the Foreign Representative failed to fulfill its duties to the Bankruptcy Court under Section 1518.

Having made this finding, the Bankruptcy Court issued an order closing the Chapter 15 case and barring the Foreign Representative from acting as a foreign representative before the Bankruptcy Court until the Foreign Representative demonstrates that “he understands and will abide by his obligations to this court as petitioner in matters before it.” Accordingly, foreign representatives, including trustees, liquidators, administrators and receivers, should be mindful of their duty to keep a US court informed in a Chapter 15 case and the risk that a US court may bar them from acting should they fail to satisfy that obligation.