Bankruptcies are global fixtures, ones not necessarily restricted by borders. A company that files for insolvency protection in the Caribbean, Europe or the Far East may also have assets and 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, and the Model Law’s American cousin, chapter 15 of the Bankruptcy Code.1
Covid-19 has spurred a rise in Chapter 15 filings. By November of 2020, chapter 15 filings were already up 68% from 2019, with the majority of filings made by representatives of Canadian, Australian, and English companies.
[Editors’ Note: What’s the difference between chapter 11 and chapter 15 bankruptcy? Learn more about chapter 15, chapter 11, and other types of bankruptcies in Dealing with Corporate Distress 01: Hello Darkness, Our Dear Friend.]
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 152, 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.3
Under chapter 15, a bankruptcy court may even consider foreign law.4 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.5
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.6 The nature and magnitude of the requisite “property” or “interest,” however, appears to be elastic.
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:
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.”7 The exception has come to be understood as pertaining to “matters of fundamental importance” such as due process, statutory, and constitutional rights.8
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.”9
Significantly, the activities of a debtor’s wholly- or partially-owned subsidiaries may be considered when determining whether the debtor carries out economic activity.11
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.
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:
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.
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.13 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).14
The purpose of chapter 15 bankruptcy is to facilitate cooperation between U.S. 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 established in 2005, there were six total filings. In 2019, there were a total of 130 chapter 15 filings, with more than 85 filings per year over the past five years.
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.
©All Rights Reserved. May, 2021. DailyDACTM, LLC
A member of Otterbourg P.C., Melanie served for 14 years as a U.S. Chief Bankruptcy Judge in the Eastern District of New York before returning to private practice in 2007. Before the bench, she was a commercial/securities litigator at Sullivan & Cromwell and Milbank Tweed. She is a Fellow of the American College of Bankruptcy…
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