In re Abc Learning Centres Ltd.

• Decision Date: 27 August 2013
• Docket Number: No. 12–2808.,12–2808.
• Citation: 728 F.3d 301
• Parties: In re ABC LEARNING CENTRES LIMITED, n/k/a ZYX Learning Centres Limited; A.B.C. USA Holdings Pty Ltd, Debtors in Foreign Proceedings RCS Capital Development, LLC, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

728 F.3d 301

In re ABC LEARNING CENTRES LIMITED, n/k/a ZYX Learning Centres Limited; A.B.C. USA Holdings Pty Ltd, Debtors in Foreign Proceedings

RCS Capital Development, LLC, Appellant.

No. 12–2808.

United States Court of Appeals,Third Circuit.

Argued: March 5, 2013.

Filed: Aug. 27, 2013.

Carson T.H. Emmons, Esq., Craig M. LaChance, Esq. [Argued], Daryl M. Williams, Esq., Baird, Williams & Greer, Phoenix, AZ, Garvan F. McDaniel, Esq., Bifferato Gentilotti, Wilmington, DE, for Appellant.

Ryan M. Bartley, Esq., Young, Conaway, Stargatt & Taylor, Wilmington, DE, Howard Seife, Esq., [Argued], Chadbourne & Parke, New York, NY, for Appellees.

Before: SCIRICA, JORDAN, and ROTH, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

RCS Capital Development LLC appeals from an order of recognition of an Australian insolvency proceeding under Chapter 15 of the Bankruptcy Code, and an order staying actions against the debtor, ABC Learning Centres, and its property in the United States. We must determine whether the Australian insolvency proceeding should be recognized as a foreign main proceeding under Chapter 15 of the Bankruptcy Code, and whether the debtor's fully-encumbered property in the United States is subject to the automatic stay under 11 U.S.C. § 1520.

I.

ABC Learning Centres Ltd. is a publicly-traded Australian company that provided child care and educational services in Australia, the United States and other countries through its 38 subsidiaries. It conducted business in the United States principally through its subsidiaries, ABC Developmental Learning Centres (USA) Inc. (ABC Delaware) and the Learning Care Group. In June 2008, RCS Capital Development LLC contracted with ABC Delaware to develop child care facilities in the United States, and ABC guaranteed ABC Delaware's loan obligations. RCS won a $47 million verdict on a breach of contract claim against ABC Delaware in Arizona state court on May 14, 2010. RCS is a defendant to a Nevada lawsuit brought by ABC Learning and ABC Delaware, seeking $30 million.

In November 2008 ABC's directors entered into Voluntary Administration in Australia, and appointed administrators to determine whether ABC could be restructured to address its insolvency, or whether it had to be liquidated. ¹ Entering into Voluntary Administration breached ABC's loan agreements with its secured creditors. This breach triggered the secured creditors' rights to realize their assets through the receivership process prescribed by Australia's Corporations Act. Corporations Act 2001 § 554E(3) (Austl.) (hereinafter “Corporations Act”). The secured creditors exercised that right and appointed a receiver. ABC was entirely leveraged, so the value of all its assets was encumbered by its secured creditors' charges. ²

ABC's directors voted to enter liquidation proceedings on June 2, 2010, and appointed two of the administrators as the liquidators to wind up the company. The receivership continued through the commencement of liquidation proceedings, and operated in tandem with the winding up. ABC's liquidators granted the receiver permission to manage and operate ABC. A liquidator realizes assets for the benefit of all the creditors, investigates charges claimed by the secured creditors, takes an accounting and payment of the value of assets the receiver realized beyond the amount of the debenture, and distributes assets on a pro rata basis among creditors of the same priority.

On May 26, 2010, the administrators-turned-liquidators petitioned the Bankruptcy Court of Delaware as ABC's foreign representatives for recognition of the Australian insolvency proceedings under Chapter 15 of the Bankruptcy Code. The petition was filed before the Arizona verdict was rendered into judgment, and the immediate focus of the stay was ABC's suit against RCS in Nevada state court. The Bankruptcy Court found the liquidation was a foreign main proceeding that met the recognition requirements and did not manifestly contravene U.S. public policy. The Bankruptcy Court ordered recognition and an automatic stay of actions against ABC and ABC's property within the United States' jurisdiction. The Bankruptcy Court granted RCS's motion to lift the stay for the purpose of rendering its Arizona verdict to judgment, and applying the judgment against the Nevada action. The District Court of Delaware upheld the Bankruptcy Court's orders, noting that RCS was granted all the relief it initially sought. RCS appeals from the District Court's order.

II.³

Congress created Chapter 15 of the Bankruptcy Code in Title VIII of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 11 U.S.C. § 1501 et seq. Under Chapter 15, U.S. bankruptcy courts must recognize a foreign insolvency proceeding when it is “a collective judicial or administrative proceeding in a foreign country ... under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23); id. § 1517(a).⁴ The statute requires recognition when the foreign proceeding meets the requirements of section 1502. Id. § 1517(a). “Upon recognition of a foreign [main] proceeding ... sections 361 and 362 apply with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.” Id. § 1520(a)(1). Section 362 stays “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title.” Id. § 362(a)(2).

Congress enacted Chapter 15 to provide effective mechanisms for dealing with cases of cross-border insolvency with the following objectives:

(1) cooperation between ... courts of the United States, ... and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases;

(2) greater legal certainty for trade and investment; (3) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor;

(4) protection and maximization of the value of the debtor's assets; and

(5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

11 U.S.C. § 1501; see also UNCITRAL Model Law on Cross–Border Insolvency preamble (stating nearly identical purposes). “Title VIII is intended to provide greater legal certainty for trade and investment as well as to provide for the fair and efficient administration of cross-border insolvencies, which protects the interests of creditors and other interested parties, including the debtor. In addition, it serves to protect and maximize the value of the debtor's assets.” H.R.Rep. No. 109–31(1), at 105 reprinted in 2005 U.S.C.C.A.N. 88, 169 (2005). The statute adopts, nearly in its entirety, the Model Law on Cross–Border Insolvency promulgated in 1997 by the United Nations Commission on International Trade Law (UNCITRAL). Id.

UNCITRAL developed the Model Law on Transnational Insolvency in response to the challenges of multinational bankruptcies where multiple insolvency regimes lacked effective mechanisms for coordination. Multiple systems limited the ability of any one bankruptcy regime to protect assets against dissipation, and allowed creditors to skip ahead of their priority by seizing assets in foreign jurisdictions. The UNCITRAL Legislative Guide explains the Model Law was designed to address

inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to a fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation and hinder maximization of the value of those assets. Moreover, the absence of predictability in the handling of cross-border insolvency cases impedes capital flow and is a disincentive to cross-border investment.... Fraud by insolvent debtors, in particular by concealing assets or transferring them to foreign jurisdictions, is an increasing problem, in terms of both its frequency and its magnitude.

U.N. Comm'n on Int'l Trade Law, UNCITRAL Legislative Guide on Insolvency Law, at 310, U.N. Sales No. E.05.V.10 (2005). Both the United States and Australia have adopted the Model Law.

The American Law Institute's Global Principles for Cooperation in International Insolvency Cases elaborates “the overriding objective [is to] enable[ ] courts and insolvency administrators to operate effectively and efficiently in international insolvency cases with the goals of maximizing the value of the debtor's global assets, preserving where appropriate the debtors' business, and furthering the just administration of the proceeding.” American Law Institute, Global Principles for Cooperation in Int'l Insolvency Cases 1.1 (2012).⁵ “[T]he emphasis must be on ensuring that the insolvency administrator, appointed in that proceeding, is accorded every possible assistance to take control of all assets of the debtor that are located in other jurisdictions.” Id. at cmt. to Global Principle 24. Chapter 15 creates an ancillary proceeding in the United States to provide support to the foreign insolvency administrator. Jay Lawrence Westbrook, Chapter 15 at Last, 79 Am. Bankr.L.J. 713, 726 (2005). The goal is to direct creditors and assets to the foreign main proceeding for orderly and fair distribution of assets, avoiding the seizure of assets by creditors operating outside the jurisdiction of the foreign main proceeding.

The Model Law reflects a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding. Westbrook, supra, at 715. In contrast, under a territorialism approach a debtor must...