Introduction
Chief Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (“Court”) issued an opinion on May 12, 2026, recognizing and enforcing a Canadian reverse vesting order (“RVO”) in the Chapter 15 cases of Iovate Health Sciences International Inc. (“Iovate”) and its affiliated debtors. Although a number of RVOs have already been recognized in the United States, this opinion is significant, as it is the first detailed opinion in the Second Circuit granting Chapter 15 recognition and enforcement of a RVO, a tool that has no direct U.S. equivalent. The Court explains in its opinion why it approved the RVO under section 1521(a)(7), instead of under section 363 of the Bankruptcy Code.
The ruling provides an important guide for cross-border restructurings where an asset sale may be commercially inadequate because key value resides in nontransferable permits, licenses, tax attributes, or contracts. It also distinguishes Canadian RVOs from U.S. deal structures like the Texas Two-Step, emphasizing that an RVO is in essence a judicial construct or remedy, implemented post-filing under the supervision of a Canadian court and the court-appointed monitor, rather than through a prepetition liability allocation transaction.
Reverse Vesting Orders
Unlike a traditional asset sale, in an RVO transaction, the debtor does not transfer all purchased assets to the purchaser free and clear of claims and interests; rather, excluded assets and liabilities are transferred out of the debtor, leaving the debtor cleansed of excluded property and related unassigned liabilities, but controlled by the purchaser through newly issued equity. This structure can be particularly attractive where the business depends on licenses, permits, tax attributes, or contractual relationships that may be difficult or impossible to transfer in a traditional asset sale.
Iovate and Its Restructuring
Iovate and its related Canadian debtors initially commenced proceedings under Canada’s Bankruptcy and Insolvency Act on September 5, 2025, and the foreign representative commenced related Chapter 15 cases on September 9, 2025. The Canadian proceeding was later converted into a proceeding under the Companies’ Creditors Arrangement Act, or CCAA, and the Ontario Superior Court of Justice (the “Canadian Court”) appointed KSV Restructuring Inc. as Monitor.
The Canadian Court approved a sale and investment solicitation process conducted by the Monitor. The transaction with the winning bidder, 1001542267 Ontario Inc., was structured as an RVO because Iovate held import and product-sale licenses in Canada that could not otherwise be transferred.
The Canadian Court approved the RVO, finding that the reverse vesting structure would preserve approximately $114 million in non-capital losses and allow contracts to remain with the company through an expedited process. In approving the RVO, the Canadian Court concluded that the structure would reduce costs, delay, and execution risk while preserving uninterrupted operations.
Recognition of the RVO and the Limits on Section 363 Relief
The foreign representative sought recognition and enforcement of the RVO under Sections 363, 1520, and 1521 of the Bankruptcy Code. Section 1520(a)(2) provides that “[u]pon recognition of a foreign proceeding that is a foreign main proceeding sections 363, 549, and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the sections would apply to property of the estate.” Section 1521 further provides that “[u]pon recognition of a foreign proceeding, whether main or nonmain, where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including— granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).”
In approving the RVO, the Court’s reasoning turned on the nature and location of the property being transferred. Since section 1520(a)(2) applies section 363 only to a transfer of a debtor’s interest in property within the territorial jurisdiction of the United States, the Court found that section 363 was not implicated because the issuance of new stock in a Canadian company was not a sale of property of the debtor in the United States.
The Court rejected the idea that the transaction should be treated as a stock sale. In a stock sale subject to section 363, a debtor sells already issued stock that it owns to a third party. In Iovate, by contrast, the existing shares were canceled, and the company was authorized to issue new shares to the Purchaser. Because the company was issuing new equity rather than selling property of the estate, the Court held that the transaction was not the kind of sale that section 363 governs.
The Court also considered whether the vesting of excluded property into ResidualCo required section 363 review. It concluded that section 363 would apply only if the excluded property constituted an interest of the debtor in property located within the territorial jurisdiction of the United States. The foreign representative represented that physical assets located in the United States would not constitute excluded property, and the Court determined that the transfer did not include property within the United States requiring section 363 review.
Ultimately, the Court recognized the RVO under section 1521(a)(7), concluding that chapter 15 gives bankruptcy courts broad authority to grant appropriate relief in aid of a recognized foreign proceeding. The Court emphasized comity, noting that U.S. bankruptcy courts regularly recognize Canadian restructuring orders and that Canadian proceedings provide procedural safeguards akin to U.S. proceedings.
The Court also found that creditors were sufficiently protected. The Canadian court had determined that no stakeholder would be worse off under the RVO structure than under any other viable alternative. The Court also emphasized the role of the independent monitor and the court-supervised Sale and Investment Solicitation Process (“SISP”) in supporting fairness and value maximization.
The opinion further recognized the nonconsensual third-party releases included in the Canadian RVO. Judge Glenn acknowledged that such releases might be impermissible if granted in a Chapter 11 case in light of the Supreme Court decision in Harrington v. Purdue Pharma, but held that Chapter 15 permits recognition of foreign-court-approved releases where creditors and other interested parties are sufficiently protected. The Court found the releases appropriately tailored because they were limited to claims arising in connection with the transaction and the RVO, and did not cover fraud or willful misconduct.
Not a Texas Two-Step
The Court recognized that the RVO may invite comparisons to divisive merger structures such as the Texas Two-Step because both kinds of structures separate desired operating assets from disfavored liabilities and cautioned against this comparison. However, the Court noted three principal distinctions.
First, the distinction in legal authority between the two structures. The Texas Two-Step is based on a statutory divisive merger mechanism under Texas law. By contrast, the RVO is a court-developed Canadian insolvency practice authorized through the CCAA’s broad jurisdictional grant.
Second, timing and supervision are different. The Court described the Texas Two-Step as a prepetition “liability shuffle,” whereby a parent entity can siphon off bad assets into a newly formed entity that then files for bankruptcy. The RVO is implemented after the CCAA proceeding begins and proceeds under the supervision of both the Canadian court and an independent monitor. That distinction mattered because the Iovate transaction was approved only after a court-supervised SISP and Canadian court review of creditor protections. In other words, the RVO does not evade the typical bankruptcy process and scrutiny of the bankruptcy court; rather, it is a restructuring tool deployed within a pending CCAA proceeding.
Third, the degree of creditor protection is different. Canadian courts apply statutory CCAA sale factors and additional RVO-specific considerations, including whether the RVO is necessary, whether it produces an economic result at least as favorable as any viable alternative, whether any stakeholder is worse off, and whether the consideration reflects the value of preserved licenses, permits, or similar assets.
Implications of Iovate
Iovate provides an important roadmap for recognizing novel foreign transactions and particularly, Canadian RVOs, where the transaction has a clear business justification tied to nontransferable regulatory assets, tax attributes, or contract continuity. Importantly, while RVOs and subsequent recognition proceedings in the United States have become increasingly common, Canadian courts have cautioned that RVOs should not be the “norm” in restructurings, and should not be used merely because of convenience. They can, however, be an appropriate way for a debtor to sell its business as a going concern where the circumstances justify such a structure. For example, in industries where assets and licenses may be difficult to transfer, such as the consulting, telecommunications, broadcast, defense, cannabis, and mining industries. It is unclear whether RVO structures offer a Canadian way to address larger, legacy contingent litigation exposures, which would not be available under U.S. bankruptcy or non-bankruptcy law or in equity.
For more information or assistance, please contact Michael B. Schaedle, Evan Jason Zucker, Jennifer K. Malow, or another member of Blank Rome’s Finance, Restructuring & Bankruptcy practice group.