Due to the increasing integration of the world’s economies, globalization is now a business reality, even for lower- and middle-market companies. Accordingly, it is becoming more commonplace for foreign debtors to initiate chapter 15 proceedings in the U.S. in connection with insolvency-type proceedings in their home countries. The increasing frequency of chapter 15 proceedings requires insolvency and restructuring practitioners to be versed in the fundamentals of chapter 15 jurisprudence before their clients encounter it.
Bitcoin (the first widely used digital currency) was just beginning to gain acceptance with U.S. businesses when one of its largest exchanges, Mt. Gox, filed a reorganization proceeding in Japan. The Trustee in the Japanese proceeding, Mr. Kobayashi, filed a Chapter 15 petition in the U.S. Bankruptcy Court in Dallas.[1] An early issue in the case was whether Mt. Gox would be permitted to continue the Chapter 15 proceeding. The Bankruptcy Court issued its ruling on June 17, 2014, granting recognition of the foreign proceeding under Section 1517. The high profile nature of this technology case is bringing greater attention to Chapter 15 bankruptcy cases.
The Global Reach of Insolvency
Chapter 15 was codified in 2005 and largely incorporates the provisions of the United Nations (U.N.) Commission on International Trade Law’s Model Law on Cross-Border Insolvency, which was adopted by the U.N. in 1997 to modernize cross-border insolvencies among its member nations. Chapter 15’s primary goal is to further the debtor’s foreign insolvency case within the U.S.[2] Indeed, pursuant to § 1501 of the Bankruptcy Code, chapter 15’s stated objectives include the following: (1) facilitating cooperation between U.S. and foreign courts; (2) providing greater legal certainty for trade and investment; (3) fostering fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other parties in interest; (4) protecting and maximizing the value of the debtor’s assets; and (5) facilitating the rescue of financially troubled businesses.
A Foreign Debtor’s Ability to Avail Itself of Chapter 15 Protections
Chapter 15 relief is available when a bankruptcy court “recognizes” a foreign debtor’s insolvency proceeding. Recognition of a foreign proceeding has been described as “formulaic,”[3] but courts are mindful that recognition should not be “rubber-stamped.”[4] Pursuant to § 1517, after notice and a hearing (commonly called a “recognition hearing”), an order recognizing a foreign proceeding shall be entered if (1) the foreign proceeding is a foreign main or foreign non-main proceeding, (2) the petition for recognition was filed by a foreign representative,[5] and (3) the petition satisfies the § 1515 standards governing its filing (e.g., the petition and related documents must be translated into English; the petition must be filed with a certified copy of the decision commencing the foreign proceedings, etc.).
Thus, the first step in a chapter 15 case is the filing of a chapter 15 petition.[6] Notably, the filing of a chapter 15 petition does not trigger the automatic stay, nor does it create a bankruptcy estate. Essentially, it is a request for recognition of a foreign insolvency proceeding.
At the recognition hearing, typically held within 30 days of the filing of the chapter 15 petition, the bankruptcy court will consider whether the chapter 15 petition should be recognized as a foreign main or non-main proceeding.[7] This distinction is important because certain relief, like the automatic stay, becomes available as soon as the order recognizing a foreign main proceeding is entered.
Generally, a foreign main proceeding is a proceeding pending in the country where the foreign debtor has its “center of main interests” (COMI), which is presumed to be the country of the debtor’s registered office. The COMI test has been analogized to the “principal place of business test.”[8]
If the chapter 15 petition is not recognized as a foreign main proceeding, a bankruptcy court may recognize a foreign proceeding as a non-main proceeding. Generally, a foreign non-main proceeding refers to a foreign proceeding pending in a country where the debtor has an “establishment.”[9] An establishment is “any place of operations where the debtor carries out a non-transitory economic activity”[10] and has been equated to a “local place of business.”[11] Although there is little guidance as to what constitutes a local place of business, the mere presence of assets in a jurisdiction may not be enough to qualify for recognition as a foreign non-main proceeding.
The Effect of Recognizing of a Foreign Proceeding in the U.S. Bankruptcy Courts
If a bankruptcy court recognizes a foreign main or non-main proceeding, the foreign representative is authorized to administer the foreign debtor’s chapter 15 case. Foreign debtors have commonly used chapter 15 to (1) protect a foreign debtor’s domestic assets from U.S. creditors; (2) authorize the use of a secured lender’s cash collateral; (3) implement the sale of assets previously authorized under a foreign proceeding; (4) implement a debtor’s foreign restructuring plan; or (5) establish a claims procedure against the foreign debtor.
Pursuant to § 1509(b), upon recognition, (1) “the foreign representative has the capacity to sue and be sued in a court in the United States,” (2) “the foreign representative may apply directly to a court in the United States for appropriate relief in that court” and (3) “a court in the United States shall grant comity or cooperation to the foreign representative.” Thus, unless the chapter 15 petition is recognized, the foreign representative is not able to avail itself of U.S. courts, except in one important case. Under § 1509(f), a foreign representative may bring an action in a U.S. court to collect or recover a claim that is the property of the debtor.
Moreover, if a proceeding is recognized as being a foreign main proceeding, certain provisions of the Bankruptcy Code immediately apply, including the automatic stay under § 362, pursuant to which the parties are enjoined from continuing or commencing any actions against the foreign debtor or its assets. Although it is generally more beneficial to a foreign debtor to have its proceeding recognized as a foreign main proceeding than as a non-main proceeding, a court may grant substantially the same types of relief in assistance of foreign non-main proceedings as main proceedings. Section 1521 provides, inter alia, that the court may grant any appropriate relief, including injunctive relief, to effectuate the purpose of chapter 15 upon recognition of a foreign proceeding, whether main or non-main.
Recent decisions have begun to add more meat to the statutory bones of chapter 15.[12] Although it is beyond the scope of this article, greater detail regarding the relationships of foreign insolvency proceedings to domestic chapter 15 cases can be found in several recent cases, including Sino-Forest Corp.,[13] dealing with third-party releases; and in ABC Learning Centres Ltd.,[14] dealing with a secured creditor’s rights in the foreign proceeding.
[1] In re MtGox Co. Ltd. (a/k/a MtGox KK), Case No. 14-31229-sgj 15, Bankr. N.D. Texas.
[2] In re British American Ins. Co. Ltd., 488 B.R. 205, 222 (Bankr. S.D. Fla. 2013) (“The goal of the United States court is to assist the objectives of the foreign proceeding consistent with the Model Law.”).
[3] In re Bear Stearns High Grade Structured Credit Strategies Master Fund Ltd., 374 B.R. 122, 126 (Bankr. S.D.N.Y. 2007), aff’d., 389 B.R. 325 (S.D.N.Y. 2008).
[4] Id.
[5] A foreign representative means a “a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.” 11 U.S.C. § 101(24). Disputes around this requirement are not common.
[6] See 11 U.S.C. § 1504.
[7] A foreign proceeding means “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23).
[8] See, e.g., In re Tradex Swiss AG, 384 B.R. 34, 42 (Bankr. D. Mass. 2008); see also Bear Stearns, 374 B.R. at 129.
[9] See 11 U.S.C. § 1502(5).
[10] 11 U.S.C. § 1502(2).
[11] See In re Ran, 607 F.3d 1017 (5th Cir. 2010).
[12] See generally Cross Border Insolvency Issues, ABI New York City Bankruptcy Conference, May 15, 2014, available at http://materials.abi.org/sites/default/files/2014/May/CrossBorderBankrIssues.pdf.
[13] 501 B.R. 655 (Bankr. S.D.N.Y. 2013).
[14] 728 F.3d 301 (3d Cir. 2013).