[1]Chapter 15 of the Bankruptcy Code was enacted in 2005 to implement the Model Law on Cross-Border Insolvency formulated by the United Nations Commission on International Trade Law (UNCITRAL). Part of the reason for needing a U.S. implementation of the Model Law was in recognition of the mutli-national presences of many entities, and thus the need for multi-national solutions for insolvencies of these entities.[2]
Obtaining chapter 15 relief is not an automatic process; the case starts with the filing of a petition for recognition, by which a foreign representative seeks the assistance of the U.S. courts. Section 1517 provides the mechanism by which such a petition is to be considered, and requires that an order recognizing a foreign proceeding shall be entered if the three requirements of § 1517(a) are satisfied[3]; however, § 1506(a) permits a bankruptcy court to refuse to take any act governed by chapter 15 that “would be manifestly contrary to the public policy of the United States.”[4] Section 1506, dubbed the public policy exception, can be invoked at any stage of a chapter 15 case, including as a bar to recognition of the proceeding itself[5] because § 1517 explicitly requires courts to consider § 1506 when granting recognition[6], which is based in part on the panoply of relief that will and can be immediately conferred upon recognition.[7] In evaluating whether an act is manifestly contrary to U.S. public policy, courts generally consider whether the act complained of violates a fundamental U.S. statutory or constitutional right[8] or whether the underlying foreign proceeding was procedurally unfair[9].
In In re Millard,[10] Hon. Robert Gerber recently analyzed whether to apply § 1506’s public policy exception to deny recognition, whether chapter 15 contains a bad-faith exception to recognition, and the post-recognition role of suspension or dismissal of a chapter 15 case under § 305,[11] all in the context of individuals who were the “debtor” parties in a foreign liquidation proceeding. William H. Millard and Patricia H. Millard had been U.S. residents until 1986, when they moved to the Commonwealth of the Northern Mariana Islands (“Marianas”). In the year they moved, they sold their interests in a worldwide computer and electronics retailer for $76.8 million. They lived in the Marianas until 1990, and in 1993 they moved to the Cayman Islands, where they lived for the next 20 years.
In 1993, the Marianas brought an action against the Millards for alleged tax liabilities. In 1994, after notice by publication only, the Marianas obtained two default judgments against the Millards for approximately $18 million each. Beginning in 2011, the Marianas sought to enforce its default judgments against the Millards in the U.S. and globally. On May 10, 2013, the Millards commenced an insolvency proceeding in the Grand Court of the Cayman Islands. Kenneth M. Krys and Margot Macinnis were appointed as the representatives of the Millards bankruptcy estates (the "foreign representatives"). On May 16, 2013, the foreign representatives filed a chapter 15 petition for recognition of the Cayman insolvency proceeding. In opposing recognition, the Marianas asserted that after nearly 20 years of interest and fees, the Millards owed the Marianas more than $118 million.
The Marianas contended that the requirements of § 1517 were not met and alternatively, that granting recognition would be manifestly contrary to U.S. public policy. The Marianas made the following arguments: (1) authorizing recognition without requiring the Millards to post a bond to stay the Marianas’ enforcement activities against them would be manifestly unjust; (2) allowing the proceeding to proceed would effectively insulate the Millards’ assets against the Marianas’ tax judgments, as foreign tax judgments are unenforceable under Cayman law; and (3) granting recognition would enable the foreign representatives to seek to set aside the default judgments, which had established the Marianas’ right to collect the unpaid taxes.
The court began its analysis by noting why each of the § 1517 elements were satisfied, specifically overruling, among other contentions, that the Cayman proceedings were not really insolvency proceedings as the Millards were not really insolvent.[12] Judge Gerber then focused on his lack of discretion to enter an order of recognition once the § 1517 elements were satisfied, absent invocation of § 1506. “[A]s a threshold matter, section § 1517 … provides in subparagraph (a) that subject to section 1506, an order recognizing a foreign proceeding shall be entered if the requirements in the three subparagraphs of section 1517(a) have been satisfied. Because section 1517(a) is preceded by the word shall, it takes away judicial discretion from me in the first instance.”[13]
Judge Gerber then noted that to properly invoke § 1506, the offensive conduct must be manifestly contrary to U.S. public policy, and agreed with the uniform view that the public policy exception is to be narrowly construed.[14] Looking at the chapter 11 case of Texaco Inc., in which the avoidance of a supersedeas bond was one of the debtor’s primary goals, and the principle that U.S. trial judges have discretion to stay enforcement of money judgments without requiring the posting of a supersedeas bond, the court firmly stated that “the ability to take an appeal without [the] posting of a supersedeas or similar bond is not at all contrary to U.S. public policy, much less is it ‘manifestly’ so.”[15]
The court then considered the Millards’ alleged wrongful insulation of assets from the Marianas. While acknowledging that certain circumstances involving the improper shielding of assets from legitimate creditor claims may “well be manifestly contrary to the public policy of the U.S. … we are far away from that coming to fruition.”[16] The court emphasized that at this early stage in the proceeding, the foreign representatives were merely seeking access to U.S. courts as authorized by § 1509 and to stay collection activity while they sought judicial review before U.S. courts of the Marianas’ tax judgments. The court reasoned that this was entirely consistent with U.S. public policy, as default judgments are generally disfavored under U.S. law, and foreign tax claims are disallowed under the U.S. common law doctrine called the Revenue Rule.[17] Judge Gerber found no basis under § 1506 to preclude recognition.
Next, the court addressed the Marianas’ alternative argument that the foreign representatives had engaged in bad-faith conduct by seeking a review of the default judgments without the posting of a bond and, as such, recognition should be denied. The court again began its analysis by looking to the language of the statute to see if chapter 15 provides a bad faith exception to recognition. Judge Gerber again noted that under § 1517, it was mandatory for the court to grant recognition absent a finding that recognition was manifestly contrary to public policy under §1506. Thus, he concluded that Congress did not give a bankruptcy judge the discretion to deny recognition for reasons outside the scope of § 1506, and that a general finding of bad faith would not constitute cause to deny recognition. Moreover, even if the court had determined that it could deny recognition upon a showing of bad faith, the court stated that the conduct complained of — seeking “protection against asset seizure without posting a bond” — did not rise to the level of bad faith.[18]
Finally, the court noted that § 305 authorizes the dismissal or suspension of a chapter 15 case, even after recognition is granted, if the court determines that the case would be better served by such dismissal or suspension. However, the court indicated that if the Marianas sought relief under § 305 prior to a full judicial review of the tax-default judgments, the court would not be inclined to grant that request.[19]
The bankruptcy court’s analysis in Millard provides a meaningful blueprint for considerations in seeking and contesting recognition, particularly on the outer limits of objections to recognition in chapter 15 cases based on the § 1506 public policy exception, and whether bad faith can be used as an independent basis to deny recognition. Millard is also instructive on the post-recognition role of dismissal or suspension under § 305.
[1] Disclaimer: None of the statements herein constitute official policy of any judge, court, agency or government official, or quasi-governmental agency.
[2] See UNCITRAL, Cross-Border Insolvency: Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, at Part 1 ¶ Preamble, U.N. Doc. A/CN.9/442 (Dec. 19, 1997), available at www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf. The authors acknowledge the substantial role that Hon. Burton Lifland played in the formulation and adoption of the Model Law and chapter 15, as well as jurisprudence thereunder. Judge Lifland passed away in January 2014. He is widely considered a giant in the national and international insolvency fields, and leaves an awe inspiring legacy.
[3] Those three requirements are the following:
- such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;
- the foreign representative applying for recognition is a person or body; and
- the petition meets the requirements of section 1515.
11 U.S.C. § 1517(a).
[4] 11 U.S.C. § 1506.
[5] See, e.g., In re ABC Learning Ctrs. Ltd., 728 F.3d 301, 309-11 (3d Cir. 2013) (raised by unsecured creditor in opposition to recognition and upholding stay of litigation in U.S.) petition for cert. filed, (U.S. Nov. 25, 2013) (No. 13-646); Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139 (2d Cir. 2013) (raised by shareholder group in opposition to recognition of British Virgin Island proceeding as foreign main proceeding); In re Gold & Honey Ltd., 410 B.R. 371-72 (Bankr. E.D.N.Y. 2009) (raised by related chapter 11 debtors in opposing Israeli receiver’s petition for recognition).
[6] Section 1517(a) states that “[s]ubject to 1506, after notice and a hearing, an order recognizing a foreign debtor shall be entered if….” 11 U.S.C. § 1517(a).
[7] See 11 U.S.C. §§ 1520 and 1521.
[8] Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139 (2d Cir. 2013); Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. De C.V. (In re Vitro S.A.B. De C.V.), 701 F.3d 1031 (5th Cir. 2012); Gold & Honey Ltd., 410 B.R. at 372.
[9] ABC Learning Ctrs. Ltd., 728 F.3d at 309; In re Qimonda AG Bankr. Litig., 433 B.R. 547, 570 (E.D. Va. 2010).
[10] In re Millard, 501 B.R. 644 (Bankr. S.D.N.Y. 2013).
[11] Section 305 provides that:
(a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if —
(1) the interests of creditors and the debtor would be better served by such dismissal or suspension; or
(2) (A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and
(B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension,
(b) A foreign representative may seek dismissal or suspension under subsection (a)(2) of this section.
11 U.S.C. § 305(a)-(b).
[12] Judge Gerber made the following statement:
The Marianas argues that chapter 15 may be used to grant recognition only in a foreign “insolvency” case. The Marianas then argues that I should make my own finding as to the Millards' insolvency, or alternatively find that the Cayman Bankruptcy Proceeding is not really an insolvency proceeding at all — all based on the Marianas' contention that I should not count the Millards' tax obligation in considering their solvency, as tax obligations are not provable as debts in the Caymans and, to the extent it matters, the U.S.
Millard, 501 B.R. at 648 (emphasis in original). Judge Gerber rejected this contention, considering it “odd” and not legally sound. Id. at 649.
[13] Id. at 653. (emphasis in original).
[14] Id. at 651 (citing In re Ran, 607 F.3d 1017, 1021 (5th Cir. 2010)); see also Gold & Honey Ltd., 410 B.R.at 372.
[15] Id. (citing In re Texaco Inc., 76 BR. 322, 324 (Bankr. S.D.N.Y. 1987)).
[16] Id. at 652.
[17] Id. (citing In re BearingPoint Inc., 2010 WL 4622458, at *1 (Bankr. S.D.N.Y. Nov. 5, 2010), in which the court defined the Revenue Rule as a “longstanding common law doctrine providing that courts of one sovereign will not enforce final tax judgments or unadjudicated tax claims of other sovereigns.”)
[18] Id. at 654.
[19] Id. at 655.