Chapter 15 Bankruptcy: A Concise Overview

What Is the Purpose of Chapter 15 Bankruptcy?

Bankruptcies are global fixtures, ones not necessarily restricted by borders. A company that files for insolvency protection overseas may also have assets and interests in the United States. Under those circumstances, the debtor’s representative may need the assistance of the US 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 and the Model Law’s American cousin, Chapter 15 of the Bankruptcy Code. [i]

Covid-19 spurred a rise in Chapter 15 filings. By November 2020, Chapter 15 filings were already up 68% from 2019, with the majority of filings made by representatives of Canadian, Australian, and English companies. While Chapter 15 filings peaked during the pandemic, they experienced fluctuations in subsequent years, dropping to 89 in 2022. However, 2023 marked a strong rebound with 189 filings — the fourth-highest total since Chapter 15’s introduction in 2005 — representing a 79% increase from the prior year.

Chapter 15: The Dog’s Tail

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, [ii]  the representative of the foreign insolvency proceeding may seek ‘recognition’ of the foreign insolvency from a US 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. [iii]

Under Chapter 15, a bankruptcy court may even consider foreign law. [iv]  By the same measure, Chapter 15 permits a court to decline to recognize a foreign insolvency proceeding or “rendering assistance” to that proceeding if the requested action is “manifestly contrary to the public policy” of US law. [v]

As a practical matter, a party seeking to invoke Chapter 15 should also be prepared to demonstrate the presence of interest or property in the US under a ruling by the Second Circuit. [vi]  The nature and magnitude of the requisite ‘property’ or ‘interest,’ however, appears to be elastic.

Requirements for Recognition Under Chapter 15

Section 1517 enumerates the requirements for recognition of a foreign proceeding. A bankruptcy court possesses very limited discretion to deny 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:

• The foreign proceeding is either categorized as a foreign ‘main’ or a foreign ‘non-main’ proceeding.
• The foreign representative is a person or body.
• The petition is accompanied by evidence of the commencement or existence of the foreign proceeding pursuant to Section 1515.

If 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.” [vii]  The exception has come to be understood as pertaining to “matters of fundamental importance” such as due process, statutory, and constitutional rights. [viii]

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 non-main proceeding.’ [ix]

• Foreign Main Proceeding — 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.”
• Foreign Non-main Proceeding — Section 1502(5) defines a ‘foreign non-main 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 non-transitory economic activity.” [x]

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

Not all foreign bankruptcies are eligible for Chapter 15 assistance. Hypothetically, if a ‘foreign non-main proceeding’ is filed where a debtor lacks an ‘establishment,’ then the debtor may be precluded from invoking Chapter 15.

Benefits of Chapter 15

A Chapter 15 petition may provide immediate benefits. 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:

• Stay execution against the debtor’s assets.
• Entrust the administration of all or part of the debtor’s assets located in the US to the provisional liquidator to protect and preserve the value of the assets.
• Suspend the debtor’s right to transfer, encumber, or otherwise dispose of any of its assets.
• Conduct an examination concerning the debtor’s assets, affairs, rights, obligations, or liabilities. [xii]

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: US 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. [xiii]

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 US property requirement of section 109(a). [xiv]

The Global Future

The purpose of Chapter 15 bankruptcy is to facilitate cooperation between US and foreign courts to help debtors and their creditors find fair and effective resolutions. In the face of globalization and growing cross-border transactions, it seems certain that the number of Chapter 15 filings will continue to increase. When Chapter 15 was introduced in 2005, only 6 cases were filed. By 2023, that number had risen to 159, with annual filings consistently exceeding 85 over the past five years.

The chart below illustrates the trend of Chapter 15 filings since 2008. [xv]

According to PACER, more than 600 Chapter 15 applications have been filed in the Southern District of New York since 2006, and more than 500 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.

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This is an updated version of an article originally published on July 10, 2017 and  updated May 19, 2021.]

©2024. DailyDAC^TM, LLC. This article is subject to the disclaimers found here.

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References

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

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

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

[iv] 11 U.S.C. § 1508.

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

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

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

[viii] In re Foreign Econ. Indus. Bank Ltd., 607 B.R. 160, 169 (Bankr. S.D.N.Y. 2019).

[ix] In a foreign main proceeding, the foreign representative is automatically afforded many of the 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 non-main bankruptcy are generally confined to those powers enumerated in the court’s orders.

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

[xi] See In re British Am. Ins. Co., 425 B.R. at 890, 916 (court granted foreign non-main 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).

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

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

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

[xv] See https://www.uscourts.gov/statistics-reports/analysis-reports/bankruptcy-filings-statistics/bankruptcy-statistics-data.