Before obtaining recognition, chapter 15 debtors filed a motion for provisional relief. Chief Bankruptcy Judge Martin Glenn of New York decided he was likely to find that the centers of main interest (COMIs) for the U.S.-incorporated subsidiaries of a Canadian parent were in Canada, not the U.S.

Judge Glenn reasoned that the U.S. subsidiaries’ COMIs likely were in Canada because their operations had been taken over before the chapter 15 filing by a Canadian receiver appointed by a Canadian court.

In his May 4 opinion, Judge Glenn said that he did “not reach this conclusion lightly, as Chapter 15 is not a substitute for Chapters 7 and 11 for U.S.-based debtors.” Judge Glenn also said he would be “vigilant of the potential for U.S. debtors to abuse the Chapter 15 process by bypassing Chapters 7 and 11.”

In the case before him, however, Judge Glenn said he was “ultimately . . . satisfied that, at least for the purposes of provisional relief, the Foreign Representative is likely to demonstrate that the COMI of each of the [U.S. incorporated debtors], as of the Petition Date, is Canada.”

The Canadian Receivership

The Canadian parent and its subsidiaries sold gifts, apparel, jewelry and other items primarily online. The companies ran into financial trouble this year when sales declined because most of the product came from China. Most of the companies’ employees and officers were based in Canada. Those in the U.S. worked remotely. The subsidiaries incorporated in the U.S. evidently generated the bulk of their income from internet sales to customers in the U.S.

The companies owed their Canadian bank about US$35 million. Following default under a forbearance agreement, the Canadian bank prevailed on a Canadian court to appoint a Canadian accounting firm to serve as receiver for the Canadian and U.S. companies in the group. The receiver was given exclusive control of all of the companies’ properties and assets.

The receiver had the power, among other things, to liquidate the companies’ assets and administer claims under the supervision of a Canadian court.

Filing chapter 15 petitions for the Canadian and U.S. companies, the Canadian receiver sought provisional relief under Section 1519. The receiver wanted automatic stay protection under Section 362 and other provisional relief.

The U.S. Trustee objected to the motion for provisional relief, contending that the U.S. debtors were unlikely to obtain recognition as either foreign main or foreign nonmain proceedings.

Overcoming the COMI Presumption

To decide whether the receiver was entitled to provisional relief, Judge Glenn was obliged to apply the standards for issuance of a preliminary injunction. Regarding the primary issue of likelihood of success on the merits, Judge Glenn focused on whether the U.S. debtors could establish that Canada was their “center of main interests,” the requisite for recognition as a foreign main proceeding under Section 1517(b).

Under Section 1516(c), the center of main interests, or COMI, is presumed to be the country with the debtor’s registered office. The three U.S. subsidiaries were incorporated in three different states in the U.S., meaning that their COMI was presumed to be in the U.S.

Judge Glenn said there are nonexclusive factors that can overcome the COMI presumption. He noted how the “Second Circuit in [Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 138 (2d Cir. 2013)] clarified that ‘the factors that a court may consider in this analysis are not limited and may include the debtor’s liquidation activities.’” Judge Glenn also cited In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022), where he held that the Cayman Islands can be the center of main interests in a chapter 15 case even though the company’s assets, management and business were in mainland China, in the absence of an objection by an affected creditor.

In Modern Land, the debtor had negotiated a scheme of arrangement to be implemented under Caymans law in a court in the Caymans. The scheme was accepted by 99% in number and 95% in amount of notes voting in an arrangement proceeding in the Caymans. No other creditors were to be affected by the scheme.

In Modern Land, Judge Glenn found that a Cayman Islands court’s supervision of a debtor’s scheme of arrangement established the Cayman Islands as the debtor’s COMI, despite the debtor’s real estate investments in China. To read ABI’s report on Modern Land, click here.

Judge Glenn went on to say that “the Second Circuit and this Court have examined the expectations of creditors and other interested parties, as a company’s COMI must be ‘ascertainable by third parties.’” In turn, he said that the “expectations of creditors can be assessed through examination of the public documents and information available to guide creditor understanding of the nature and risks of their investments.”

One of the three U.S. incorporated companies had office space exclusively in Canada, where its books and records were located. All of its managerial decisions were made by executives of the Canadian parent. In addition, its most significant creditor was a Canadian bank.

When the chapter 15 petition was filed, Judge Glenn noted that the Canadian receiver had been given “broad power” over the assets and management of the subsidiary. As of the petition date, Judge Glenn found that the receiver was likely to obtain foreign main recognition for the U.S. subsidiary because its COMI “was likely [in] Canada.”

The other two subsidiaries were incorporated in other U.S. states, but the Canadian receiver had authority over their assets. The Canadian receivership, Judge Glenn said, “similarly constitutes pre-filing restructuring activities likely to establish [the subsidiaries’] COMI in Canada.”

Judge Glenn found that the Canadian receiver “is therefore also likely to succeed on [foreign-main] recognition.”

In satisfaction of the other requirements for issuance of a preliminary injunction, Judge Glenn found that the likelihood of irreparable harm absent provisional relief favored the Canadian receiver. Likewise, he found the balance of harm and the public interest in favor of issuing provisional relief.

Caveat

In opposition to the grant of provisional relief, the U.S. Trustee cited In re Black Press Ltd., 24-10044 (Bankr. D. Del. Feb. 8, 2024), where Judge Glenn described the Delaware bankruptcy court as having “declined to find COMI with respect to an international conglomerate’s U.S.-incorporated subsidiaries.” However, he noted that the Delaware judge had granted provisional relief because the foreign representative “had demonstrated a likelihood of success at recognition as to all the debtors, including those entities incorporated in the U.S.”

In the Black Press case, Judge Glenn observed that the U.S. subsidiaries operated independently from the Canadian debtors. “By contrast,” he said, “it does not appear that the COMI of the U.S. entities is the United States rather than in Canada, particularly after the initiation of the [Canadian receivership].”

Judge Glenn overruled the objection and granted provisional relief.