In recognition of the increasingly global nature of business, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added a new chapter, chapter 15, to the Bankruptcy Code. It represents the U.S.’ nearly word-for-word adoption of the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency (the “Model Law”), which was promulgated in 1997. To date, the Model Law has been adopted in 20 countries[1] and it does not represent substantive bankruptcy law, but instead creates a procedural framework for coordination of local bankruptcy laws.
Chapter 15 has five objectives: (1) promoting cooperation among U.S. courts, parties in interest and the courts of other competent authorities of foreign countries involved in cross-border insolvency cases; (2) establishing greater legal certainty for trade and investment; (3) providing for the fair and efficient administration of cross-border insolvencies to protect the interests of all creditors and other interested entities, including the debtor; (4) affording protection and maximization of the value of the debtor’s assets; and (5) facilitating the rescue of financially troubled businesses, thereby protecting investment and preserving employment.[2] Chapter 15 replaced § 304 of the Bankruptcy Code, which provided for relief to foreign liquidators and receivers on comity grounds alone. Unlike the mandatory protections provided by chapter 15, § 304 was largely discretionary, providing only that courts “may” grant the relief enumerated in the section. Before granting recognition, § 304 required inquiry into the nature and purpose of the foreign proceeding.
Commencing a Chapter 15 Case
A chapter 15 case begins with a “foreign representative” filing a petition for recognition of the foreign proceeding in a U.S. bankruptcy court.[3] The petition must include a copy of the decision commencing the foreign proceeding, a certificate from the foreign court affirming the existence of the foreign proceeding or other evidence of the proceeding’s existence, and a statement identifying all foreign proceedings with respect to the debtor.[4] The foreign representative must provide notice of the petition for recognition in compliance with the notice provisions laid out in Federal Rule of Bankruptcy Procedure 2002(q)(1); the minimum period for such notice is 20 days.
Recognition is granted unless an interested party or the court raises a concern that recognition “would be manifestly contrary to the public policy of the United States.”[5] However, this is a very high bar and recognition is not usually denied on this ground.
There is a gap between the foreign representative’s filing of the petition for recognition and the hearing at which the bankruptcy judge grants recognition. During this period, most protections of the Bankruptcy Code are not available but the bankruptcy court may grant immediate relief, such as a temporary restraining order, if it is necessary to protect the debtor’s assets or the interests of the creditors.[6]
Implications of the Two Types of Chapter 15 Proceedings
Chapter 15 provides for recognition of two types of foreign proceedings: main and non-main.[7] A main proceeding is one that is pending in the country in which the debtor has its “center of its main interests” (COMI). In the absence of evidence to the contrary, the COMI is presumed to be where the debtor’s registered office is located.[8] For an individual debtor, its COMI is presumed to be his/her place of residence.[9] A non-main proceeding is one taking place in a country in which the debtor has only an “establishment.”[10] An establishment is any place of operations where the debtor carries out “nontransitory economic activity.”[11] Disputed recognition petitions tend to center on whether the proceeding is main or non-main. Even without party objection, judges may request more evidence to support the location of the COMI.[12]
Upon the bankruptcy court’s recognition of a foreign proceeding as main, §§ 361, 362, 362, 363, 549 and 552 of the Bankruptcy Code go into effect with respect to the debtor’s property located within the U.S.[13] The foreign representative is entitled to operate the debtor’s U.S. business in the ordinary course[14] and in a recognized main proceeding, may also seek additional relief from the bankruptcy court or from other state and federal courts.[15] If recognized as a main proceeding, the law of the foreign country in which the proceeding is pending will govern the ancillary U.S. case.[16] In a non-main proceeding, however, these protections are not automatic; rather, the foreign representative must petition the court for specific relief, and the court has total discretion whether or not to grant it.[17]
Differences Between Chapter 15 and Chapter 11
Some chapter 11 provisions were not incorporated into chapter 15. For example, §§ 364 (a debtor’s access to credit), 365 (a debtor’s rights with respect to executory contracts and unexpired leases) and 366 (a debtor’s relationship with utility service providers) do not apply in a chapter 15 proceeding. Furthermore, a foreign representative does not have the authority to bring avoidance actions such as preferences or fraudulent transfers, on behalf of the foreign debtor.[18] However, the foreign representative in a recognized main proceeding has the right to file a full U.S. bankruptcy case (as opposed to an ancillary chapter 15 case) in order to gain all of the benefits of the Bankruptcy Code.[19]
International Cooperation in Chapter 15 Cases
A U.S. bankruptcy judge must cooperate with the foreign bankruptcy court or foreign representative “to the maximum extent possible.”[20] Furthermore, chapter 15 seeks to protect foreign creditors by prohibiting discrimination against them and requiring notice to them of the U.S. case.[21] However, creditors file their claims directly in the foreign proceeding, as opposed to in the U.S. proceeding.
Recent Authority Split Regarding Eligibility and the Path Forward
As chapter 15 has been in effect for less than 10 years, the case law interpreting it is still developing. This is illustrated by the recent split of authority as to whether a foreign debtor must have assets located within the U.S. in order to be eligible for chapter 15. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), the Second Circuit held that § 109’s eligibility requirements apply to chapter 15 recognition proceedings.[22] However, in an oral ruling several days later, the U.S. Bankruptcy Court for the District of Delaware held that § 109 does not apply and that as a result, whether or not the debtor has assets located in the U.S. is irrelevant to a determination of whether it is entitled to chapter 15 relief.[23] Such splits demonstrate the work laid out for bankruptcy judges and courts of appeal as chapter 15 becomes more established and the case law more developed.
[1] See Status: UNCITRAL Model Law on Cross-Border Insolvency, available at www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.
[2] 11 U.S.C. § 1501.
[3] Id. at § 1504.
[4] Id. at § 1515(b).
[5] Id. at § 1506.
[6] Id. at § 1519(a).
[7] Id. at § 1517.
[8] Id. at § 1516(c).
[9] Id.
[10] 11 U.S.C. § 1502(5).
[11] Id. at § 1502(2).
[12] See, e.g., In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2008), aff’d 389 B.R. 325 (S.D.N.Y. 2008); In re Basis Yield Alpha Fund (Master), 381 B.R. 37 (Bankr. S.D.N.Y. 2008).
[13] 11 U.S.C. § 1520.
[14] Id.
[15] Id. at §§ 1509 and 1511.
[16] Id. at §§ 1504 and 1515(a).
[17] Id. at § 1521(c).
[18] Id. at §§ 1520, 1521(a)(7) and 1523(a).
[19] Id. at §§ 1509and 1511.
[20] Id. at § 1525.
[21] Id. at §§ 1513-14.
[22] 2013 WL 6482499 (2d Cir. Dec. 11, 2013).
[23] In re Bemarmara Consulting a.s., Case No. 13-13037 (KG) (Bankr. D. Del. Dec. 17, 2013).