8th International Business Recovery Forum

Sofitel Hotel, São Paulo, Brazil June 10-12, 2010

Chapter 15 and Other U.S. Legal Tools to Recover Misappropriated Assets

Edward H. Davis, Jr., Esq.

Douglas J. Giuliano, Esq.

A STIGARRAGA D AVIS The Power of Focus ® 701 Brickell Ave, 16 th Floor, Miami, FL 33131 Tel: (305) 372-8282 Fax: (305) 372-8202 e-mail: [email protected]

Useful Legal Tools to Recover Misappropriated Assets

Examples of legal tools in the U.S. legal system to discover and eventually recover misappropriated assets include:

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Chapter 15 of the U.S. Bankruptcy Code 28 U.S.C. 1782

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Subpoenas Under Seal and Other Mechanisms Under Federal Rules of Civil Procedure

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Chapter 15 of the U.S. Bankruptcy Code

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Chapter 15, Title 11 of the U.S. Bankruptcy Code was modeled after the Model Law on Cross-Border Insolvency developed by UNCITRAL

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It is used to start an “ancillary” or secondary action in the U.S. to aid the representative of a pending liquidation, insolvency, bankruptcy, etc. in a foreign country

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Chapter 15 of the U.S. Bankruptcy Code

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An ancillary action under Chapter 15 is initiated by the representative of the foreign estate filing an application with U.S. court, along with copies of the foreign court papers

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If the application is approved, certain provisions of the Bankruptcy Code will be triggered, including 11 U.S.C 362, the “automatic stay” provision, which instantly suspends any judicial actions against the debtor

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Chapter 15 of the U.S. Bankruptcy Code

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Among the primary benefits of Chapter 15 is the broad discovery powers that is given to the foreign representative, including the ability to take depositions and request documents, under 11 USC 1521(a)(4)

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In general, the U.S. bankruptcy court will strive to assist the representative and the foreign court as much as possible within the parameters of the Bankruptcy Code

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Chapter 15 of the U.S. Bankruptcy Code

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A recent example of this assistance is the case of In re Condor Ins. Ltd., 601 F.3d 319 (5th Cir. 2010).

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The case involved a Chapter 15 action initiated by the representative of a debtor in an insolvency proceeding in Saint Kitts and Nevis

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After the Chapter 15 petition was granted, the representative filed an action in the U.S.

bankruptcy court, based on Nevis law, to recover stolen assets that had been transferred to the U.S.

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Chapter 15 of the U.S. Bankruptcy Code

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The bankruptcy court rejected the action, however, ruling that Chapter 15 did not authorize a U.S.

bankruptcy court to apply foreign avoidance law

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On appeal, the Fifth Circuit reversed the bankruptcy court’s ruling and held that Chapter 15 indeed allows actions in the U.S. based on foreign avoidance law

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The Condor case thus widened the options for a foreign representative seeking to recover misappropriated assets that are taken to the U.S.

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Chapter 15 of the U.S. Bankruptcy Code

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The applicability limitations, however of Chapter 15 does have

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A recent example of such limitations is the case of In re Ran, 2010 WL 2106638 (5th Cir. 2010).

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There, the appellate court affirmed the lower court’s denial to recognize a bankruptcy proceeding that was pending in Israel, on the ground that the “center of main interest” was the U.S., not Israel, due primarily to the debtor’s residency in the U.S.

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Chapter 15 of the U.S. Bankruptcy Code

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As seen in the In re Ran case, the “center of main interest” is an important consideration in would-be Chapter 15 cases

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Although not defined in the Bankruptcy Code, it is presumed that the “center of main interest” is the debtor’s principal place of business (if a company), or the debtor’s residence (if an individual)

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Chapter 15 of the U.S. Bankruptcy Code

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If the requirements can be satisfied, Chapter 15 can prove very useful for creditors in cases involving extraterritorial misappropriation of assets

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Chapter 15 was used successfully by the undersigned in a recent case where the debtor is a large Brazilian company that went insolvent to obtain documents from U.S. banks regarding the debtor’s accounts there

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Not only was the Chapter 15 application approved, the court also allowed the discovery to be done under seal

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Chapter 15 of the U.S. Bankruptcy Code

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In another successful Chapter 15 case brought by the undersigned firm, the custodian of a Caribbean-based bank whose assets had been misappropriated by fraudsters

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The Custodian was able to use Chapter 15’s discovery devices to search for the misappropriated assets, which were suspected of having been transferred to the Cayman Islands and other places, including Central America

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28 U.S.C. § 1782

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Another useful tool in the U.S. legal system for foreign litigants is an application for discovery pursuant to 28 U.S.C. § 1782

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This statute allows federal district courts to provide assistance to foreign litigants seeking discovery from U.S. individuals or entities to be used in the foreign litigation

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28 U.S.C. § 1782

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Although the statute only grants a court the discretion to provide assistance and does not require them to do so, usually the courts will oblige the requesting party if the statute’s requirements are met

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If assistance is provided, the requesting party may seek discovery, including depositions and document requests, in accordance with the Federal Rules of Civil Procedure

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28 U.S.C. § 1782

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The application for assistance may be filed in secrecy, or under seal, if it contains sensitive information or otherwise might lead to the destruction of the evidence sought to be preserved by the party filing the application

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While requests to have papers filed under seal are not automatically granted and lie within the court’s discretion, they are of potential use nonetheless

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Federal Rules of Civil Procedure

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The Federal Rules of Civil Procedure (FRCP) govern the interrogatories taking of discovery, including depositions, requests for documents, and written

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In most situations, depositions and requests for documents to non-parties in a case are done through subpoenas, which are governed by FRCP 45

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Federal Rules of Civil Procedure

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The federal district court has discretion to control the discovery process done pursuant to the FRCP

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For instance, it can allow a party to issue subpoenas under seal and gag, meaning only the recipient of the subpoena is aware of it, and the recipient contempt is restricted from divulging the existence of the subpoena under penalty of

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Other Useful Legal Tools

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There are many other potentially useful legal tools to aid in the recovery of misappropriated assets besides Chapter 15, 28 U.S.C.

§ 1782, and subpoenas

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Among these are Norwich Pharmacal / Banker’s Trust and Anton Piller orders

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Other Useful Legal Tools

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Norwich Pharmacal / Banker’s Trust orders are granted by some courts in cases where a bank’s customer is suspected of defrauding someone

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The bank may be ordered to disclose the customer’s confidential financial records to the victim, and in most cases the order will include a “gag” or “seal” component, to prevent the suspected wrongdoer from learning of the order

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Other Useful Legal Tools

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Anton Piller orders authorize the premises of a suspected fraudster to be searched, and evidence found therein to be seized, without prior notice to the fraudster

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They are issued in cases with a serious risk that incriminating evidence will be destroyed absent court intervention

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Conclusion

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There are many useful tools in the U.S. legal system available to foreign litigants

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Among these are an ancillary action under Chapter 15, applications for assistance under 28 U.S.C. § 1782, and discovery under the Federal Rules of Civil Procedure

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Precisely which tools are available and to what extent they will afford relief will depend on the circumstances of each case

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8th International Business Recovery Forum

Sofitel Hotel, São Paulo, Brazil June 10-12, 2010

Chapter 15 and Other U.S. Legal Tools to Recover Misappropriated Assets

Edward H. Davis, Jr., Esq.

Douglas J. Giuliano, Esq.

A STIGARRAGA D AVIS The Power of Focus ® 701 Brickell Ave, 16 th Floor, Miami, FL 33131 Tel: (305) 372-8282 Fax: (305) 372-8202 e-mail: [email protected]