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July 10, 2017

By Hon. Melanie L. Cyganowski (Ret.)[1]
Otterbourg P.C.

 


Like commerce in general, bankruptcies are not necessarily restricted by borders. A company that files for insolvency protection in the Caribbean, Europe or the Far East may also have assets or interests elsewhere, like New York or Miami. Under those circumstances, the debtor’s representative may need the assistance of the U.S. bankruptcy courts to achieve an efficient resolution of claims. On that score, enter the Model Law on Cross-Border Insolvency (the “Model Law”) promulgated by the United Nations[2], and the Model Law’s American cousin, Chapter 15 of the Bankruptcy Code.[3]

 

Practically speaking, think of Chapter 15 as the tail, and the overseas bankruptcy as the dog. In other words, it is ancillary (but potentially essential) to the main foreign bankruptcy. Under Chapter 15[4], the representative of the foreign insolvency proceeding may seek “recognition” of the foreign insolvency from a U.S. Bankruptcy Court. The court’s decision to grant recognition is generally governed by 11 U.S.C. §1517, which is generally non-discretionary, and “objective” in its application.[5]

 

Under Chapter 15, a bankruptcy court may even consider foreign law.[6] By the same measure, Chapter 15 permits a court to decline recognizing a foreign insolvency proceeding or “rendering assistance” to that proceeding if the requested action is “manifestly contrary to the public policy” of U.S, law.[7] As a practical matter, a party seeking to invoke Chapter 15 should also be prepared to demonstrate the presence of an interest or property in the U.S. under a ruling by the Second Circuit.[8] The nature and magnitude of the requisite “property” or “interest,” however, appears to be elastic.

 

In 2016 the Bankruptcy Courts witnessed a record number of Chapter 15 filings. According to PACER, parties made 180 filings for ancillary relief under Chapter 15 in 2016, which was up from 95 in 2015 and 69 in 2014. The end of the Great Recession has not spelled the end of Chapter 15’s utility.

 

Requirements for Recognition Under Chapter 15

Section 1517 provides the requirements for granting recognition of a foreign proceeding. A bankruptcy court has very limited discretion to decline to grant recognition to a foreign proceeding. Section 1517 provides that, subject to Section 1506, an order recognizing a foreign proceeding shall be entered by the Court if the requirements of Section 1517(a) are met: (a) the foreign proceeding is either categorized as a foreign “main” or foreign “nonmain” proceeding; (b) the foreign representative is a person or body; and (c) the petition is accompanied by evidence of the commencement or existence of the foreign proceeding pursuant to Section 1515.

 

Provided that the requirements of Section 1517(a) are met, Section 1506, which contains a public policy exception, is the one other potential limiting factor. Recognition may be denied under Section 1506, where recognition of the action “would be manifestly contrary to the public policy of the United States.”[9]

 

The “Types” of Chapter 15 Proceedings

Section 1504 provides that a Chapter 15 case is commenced “by the filing of a petition for recognition of a foreign proceeding under section 1515.” The Bankruptcy Court may recognize a case as either a “foreign main proceeding” or a “foreign nonmain proceeding.”[10] Section 1502(4) of the Bankruptcy Code defines a “foreign main proceeding” as “a foreign proceeding pending in the country where the debtor has the center of its main interests.” Section 1502(5) defines a “foreign nonmain proceeding” as “a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.” In turn, section 1502(2) of the Bankruptcy Code defines “establishment” as “any place of operations where the debtor carries out a nontransitory economic activity.”[11]

 

Significantly, the activities of a debtor’s wholly or partially owned subsidiaries may be considered when determining whether the debtor carries out economic activity.[12]

 

Practically speaking, not all foreign bankruptcies are eligible for Chapter 15 assistance. Hypothetically, if a “foreign nonmain proceeding” is filed where a debtor lacks an “establishment”, then the debtor may not be able to invoke Chapter 15.

 

Effect of Chapter 15

A Chapter 15 petition may provide immediate benefits. Specifically, pursuant to Section 1519 of the Bankruptcy Code, even before the foreign proceeding is formally recognized, upon the filing of the Chapter 15 petition, the provisional liquidator will be expected to seek relief from the Bankruptcy Court to, among other things, (i) stay execution against the debtor’s assets; (ii) entrust the administration of all or part of the debtor’s assets located in the U.S. to the provisional liquidator to protect and preserve the value of the assets; (iii) suspend the debtor’s right to transfer, encumber or otherwise dispose of any of its assets; and (iv) conduct an examination concerning the debtor’s assets, affairs, rights, obligations or liabilities.[13] Upon recognition by the Bankruptcy Court of the foreign proceeding, the foreign representative possesses the right to seek additional relief pursuant to Section 1521 of the Bankruptcy Code.

 

Applicability of Section 109: U.S. Property as an Additional Requirement

In the Second Circuit, a debtor must also satisfy the requirements of section 109 of the Bankruptcy Code to be eligible for Chapter 15 recognition.[14] Section 109(a) provides: “Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.” Retainers, claims or causes of action may satisfy the U.S. property requirement of section 109(a).[15]

 

Conclusion

 

In the face of globalization and growing cross-border transactions, it seems certain that the number of Chapter 15 filings will continue to increase. According to PACER, more than 400 Chapter 15 applications have been filed in the Southern District of New York since 2006, and more than 300 cases have been filed in the District of Delaware since 2007. Given the number of cases filed in these two jurisdictions alone, a practitioner should become familiar with the precedents of these courts, even if relief under Chapter 15 is sought elsewhere.

 


 

[1]  Former Judge Cyganowski was Chief Judge (2005-2007), served a full term in the Bankruptcy Court in the Eastern District of New York (1993-2007) and is currently Chair of the Bankruptcy Department at Otterbourg P.C. She gratefully acknowledges the assistance of Kathleen M. McGonigle, summer law intern at Otterbourg.

[2] http://www.cnudci.org/uncitral/en/uncitral_texts/insolvency/1997Model.html

[3] 11 U.S.C. §§ 1501 – 1532. Pub.L. 109-8, Title VIII, § 801(a), Apr. 20, 2005, 119 Stat. 135.

[4] 11 U.S.C. §§ 1504, 1509, 1514, 1517 and 1520.

[5] In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685, 697 (Bankr. S.D.N.Y. 2010).

[6] 11 U.S.C. § 1508.

[7] Model Law, Art. 6; 11 U.S.C. § 1506.

[8] See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 247 (2d Cir. N.Y. 2013).

[9] In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013).

[10] In a foreign main proceeding, the foreign representative is automatically afforded many of the same rights and powers possessed by a debtor or trustee in a Chapter 7 or 11 bankruptcy case. By contrast, the foreign representative’s actual powers in a foreign nonmain bankruptcy are generally confined to those powers enumerated in the court’s orders.

[11] See In re British Am. Ins. Co., 425 B.R. 884 (Bankr. S.D. Fla. 2010).

[12] See In re British Am. Ins. Co., 425 B.R. at 890, 916 (court granted foreign nonmain recognition to a proceeding commenced in Trinidad predicated upon the presence of two Trinidad subsidiaries – one of which was not wholly-owned — coupled with local business activity, and local clients).

[13] 11 U.S.C. §§ 1519(a), 1521(a)(3)-(4).

[14] See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 247 (2d Cir. N.Y. 2013).

[15] See In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 370 (Bankr. S.D.N.Y. 2014).



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