Opinion ID: 581367
Heading Depth: 2
Heading Rank: 1

Heading: Threshold Determination of Ownership Issue.

Text: 30 Section 304(a) authorizes a foreign representative in a foreign [bankruptcy] proceeding to commence a [c]ase ancillary to [that] proceeding in a United States bankruptcy court to protect the administration of the foreign proceeding. The purpose of a § 304 petition is to prevent the piecemeal distribution of assets in the United States by means of legal proceedings initiated in domestic courts by local creditors. Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 713-14 (2d Cir.1987); Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 454-55 (2d Cir.1985). A bankruptcy court is given broad latitude in fashioning an appropriate remedy in a § 304 proceeding. In re Axona Int'l Credit & Commerce Ltd., 88 B.R. 597, 606 (Bankr.S.D.N.Y.1988), aff'd, 115 B.R. 442 (S.D.N.Y.1990), appeal dismissed, 924 F.2d 31 (2d Cir.1991); In re Culmer, 25 B.R. at 624; see also S.Rep. No. 989, 95th Cong., 2d Sess. 35 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5821 (§ 304(c) guidelines are designed to give the court the maximum flexibility in handling ancillary cases). 31 We nonetheless disagree with the bankruptcy court's ruling in this case that a turnover was properly ordered upon the de minimis showing that the disputed funds in the Account were included in the property involved in Mebco's liquidation proceedings, ... [and] located in this district. 130 B.R. at 712. The court rejected the notion that it was required to make a threshold finding as to the ownership of the funds prior to issuance of the turnover order. In our view, this was not a proper reading of § 304(b)(2). 32 The applicable distinction is drawn in Lawrence P. King, 2 Collier on Bankruptcy p 304.01, at 304-3 (15th ed. 1992) (emphasis added): For purposes of section 304, the estate of a foreign debtor is defined by the law of the jurisdiction in which the foreign proceeding is pending, with other applicable law serving to define the estate's interest in particular property. See also In re Lines, 81 B.R. 267, 271 (Bankr.S.D.N.Y.1988) (same). 33 This interpretation of § 304(b)(2) is supported by the language of the statute. While § 304(b)(1) empowers a bankruptcy court to enjoin litigation with respect to property involved in a foreign insolvency proceeding, presumably to prevent dismemberment by local creditors of assets located here, S.Rep. No. 989 at 35, § 304(b)(2) authorizes turnover only of property of such estate, or proceeds of such property. Thus, the use of the term property of such estate presupposes an antecedent determination of property interests as a condition to the turnover of property to a foreign representative. 34 This analysis finds further support in the analogy provided by the related provisions of federal bankruptcy law applicable to domestic cases. In a domestic bankruptcy, the commencement of a case creates a bankruptcy estate. 11 U.S.C. § 541(a) (1988). The estate is defined to comprise all legal or equitable interests of the debtor in property as of the commencement of the case (with exceptions not pertinent here), which definition is supplemented by a listing of several more specifically described categories of property interests. Id. § 541(a)(1)-(7). Nonetheless, [a]lthough federal bankruptcy law determines the outer boundary of what may constitute property of the estate, state law determines the 'nature of a debtor's interest' in a given item. In re Crysen/Montenay Energy Co. (Crysen/Montenay Energy Co. v. Esselen Assocs., Inc.), 902 F.2d 1098, 1101 (2d Cir.1990) (quoting In re Howard's Appliance Corp. (Sanyo Elec., Inc. v. Howard's Appliance Corp.), 874 F.2d 88, 93 (2d Cir.1989)). 35 We see no reason why a similar allocation as to controlling law should not apply in § 304 cases. Property interests have an independent legal source, antecedent to the distributive rules of bankruptcy administration, that determines in the first instance the interests of claimant parties in particular property. It logically follows that before a particular property may be turned over pursuant to § 304(b)(2), a bankruptcy court should apply local law to determine whether the debtor has a valid ownership interest in that property when the issue is properly posed by an adverse claimant. 36 Koreag advances two objections to such application of local law by a bankruptcy court. Its first argument, that § 304 permits the turnover of any property involved in a foreign bankruptcy, is simply at odds with the relevant statutory language. Although Congress provided in § 304(b)(1) for certain injunctions to be issued regarding property involved in a foreign insolvency proceeding, § 304(b)(2) authorizes turnover only of property of [the] estate in a foreign proceeding. Thus, Congress used different language in § 304(b)(1) and (2), the two provisions perform different functions, and we are not at liberty to ignore this legislative choice. 37 Koreag next contends that if local law is to be applied, the foreign forum presiding over the insolvency estate, and not a local bankruptcy court, should apply that law. Koreag presses the point that adjudication of creditors' claims in a U.S. court will deprive other creditors of an opportunity to be heard, and defeat the policy of distribution by a single forum which § 304 is designed to ensure. In this connection, Koreag cites In re Lines, 81 B.R. at 272, for the proposition that Refco's claims should be adjudicated in the Swiss proceeding. We find these arguments unavailing. 38 Koreag, as liquidator, has asked a United States bankruptcy court to require the turnover of disputed assets to a foreign insolvency proceeding. The power of the court extends to property of [the] estate. § 304(b)(2). Once a plausible challenge is presented as to whether particular property falls within the statutory definition, the bankruptcy court whose authority is invoked must determine the legitimacy of that invocation. The nature of this determination demands that it be made prior to the turnover of the property. It is unsatisfactory to say that the property should first be turned over, because it is the ascertainment that property is of [the] estate under local law that defines the extent of the court's power to issue the turnover order. 39 It is also not the case that Mebco's other creditors are prejudiced by such a threshold determination as to property ownership. Refco is not merely asserting rights as an ordinary creditor or claimant in a bankruptcy proceeding. Its position is that Mebco does not own the Disputed Funds. A determination that the funds are not property of the estate therefore does not improperly affect other creditors of the estate, because they have valid claims only against the estate's bona fide assets. The situation is clearly distinguishable from an effort by a normal bankruptcy creditor, without any plausible ownership claim to a specific asset, to gain a preferred position vis-a-vis other creditors by initiating a separate legal proceeding. Cf. Victrix, 825 F.2d at 714 (refusal to countenance attachment designed to evade writ of Swedish bankruptcy court); Cunard, 773 F.2d at 456 (same). 40 Finally, In re Lines does not support Koreag's position. That case involved an injunction under § 304(b)(1), utilizing the broader involved in standard of that provision. See 81 B.R. at 272. Nevertheless, the court did engage in a threshold determination of local law, holding that the particular property at issue, an insurance fund, was sufficiently connected to the debtor under New York law to be involved in the foreign insolvency proceeding. See id. at 271. We similarly conclude that particular property must be determined to be of [the] estate before it may be turned over pursuant to § 304(b)(2). 41