Bankruptcy Judge Robert E. Gerber authored an important opinion on cross-border insolvency when he held that a foreign liquidator’s “minimal” activities before a chapter 15 filing do not provide a basis for finding that the center of main interest, or COMI, moved from the place of business to the liquidator’s jurisdiction.
Judge Gerber, sitting in Manhattan, said that the debtor’s “tactics were a paradigmatic example of bad faith.” Although he did not dismiss the chapter 15 petition for bad faith, his 74-page opinion contains extensive dicta describing how a court in the future could respond to a bad-faith filing if the requirements of foreign recognition were otherwise met.
The case presented facts that are amusing to the reader, albeit maddening to the creditor opposing recognition of the foreign liquidation.
The debtor corporation did most of its business in the U.K., where the English High Court of Justice was on the cusp of entering a $5.6 million judgment in favor of the creditor, which later opposed so-called foreign main recognition in the U.S. Before the judgment was entered, the company initiated a voluntary liquidation in the British Virgin Islands, where it could appoint its own liquidator. The debtor also moved $9.5 million out of the U.K. to prevent attachment in that country.
The company only provided the liquidator with enough financing to perform the “statutory bare minimum,” Judge Gerber said. The liquidator then filed the chapter 15 petition.
Judge Gerber said in his Jan. 13 opinion that the company intended to invoke chapter 15 and obtain an injunction preventing the creditor from seizing assets in the U.S., a strategy the judge called “egregious bad faith.”
The opinion is an application of the Second Circuit’s 2013 Fairfield Sentry decision to a different set of facts. In that case, the appeals court held that a COMI could move to the jurisdiction where the foreign liquidation is located, thus justifying recognition of a foreign main proceeding.
His case was different, Judge Gerber said, because the debtor failed to satisfy Section 1517(a) since the British Virgin Islands liquidation did not qualify as a foreign main proceeding given the paucity of activities in that venue.
Judge Gerber held that a so-called letterbox jurisdiction can be the COMI “only where material activities have been undertaken in the jurisdiction in which the foreign proceeding was filed.” To support his conclusion, he interpreted Fairfield Sentry as meaning that “a COMI manipulated in bad faith would not be a valid COMI.”
Based on the same fact findings, Judge Gerber said the British Virgin Islands did not qualify as a venue for the foreign non-main proceeding because there was no “establishment” there.
Judge Gerber did not say directly whether bad faith can be grounds for dismissal of a chapter 15 petition. Instead, he devoted a good portion of his opinion to analyzing how a court could respond short of dismissing if the chapter 15 debtor were in demonstrable bad faith.
Even if the court were constrained to grant foreign main recognition, Section 362 has a safety value for bad faith, Judge Gerber said in dicta. That section, applicable in chapter 15 by Section 1520(a)(1), allows a court to modify the automatic stay. He went on to say that modifying the automatic stay for “cause” has “long been a classic remedy for bad faith filing.”
Judge Gerber buttressed his analysis by reading Fairfield Sentry to mean that a “bad faith invocation of the Code” can “trump any apparent COMI” based on “literal compliance with the requirements of Section 1517.”