Writing an opinion that reads like a treatise, Bankruptcy Judge James L. Garrity, Jr. of New York granted foreign main recognition even when the purpose of the chapter 15 filing was to enjoin a shareholders’ suit in New York.
Contrasted to a chapter 11 case that can be dismissed if bankruptcy was a litigation tactic, Judge Garrity held that foreign liquidators are not held to the same standard when the issue is whether to grant foreign main recognition. That is to say, the standards for a legitimate chapter 11 filing are not imported onto gatekeeping functions in chapter 15.
The eventual import of Judge Garrity’s more relaxed approach to chapter 15 recognition is unclear because he left the door open to modifying the automatic stay on motion by the plaintiffs in the New York suit.
Prior Operations Exclusively in the U.S.
The debtor operated in the U.S. It was acquired in a $610 million leveraged buyout in 2004. In 2006, the debtor repaid the buyer’s $200 million investment. In 2007, the debtor borrowed $850 million to pay off $400 million in existing debt and make a $375 million dividend to shareholders.
In 2012, the debtor transferred all of its operating assets to another company. According to Judge Garrity’s July 2 opinion, the debtor was solvent after the transfer, having cash but no other assets. In 2013, the debtor initiated a so-called members’ voluntary liquidation in Bermuda, where the debtor was incorporated. Two accountants from Bermuda were appointed as joint liquidators.
Later in 2012, holders of 3.8% of the debtor’s stock filed a derivative action in New York State court. The suit was aimed at directors and controlling shareholders. The debtor was a nominal defendant. The plaintiffs were attacking the $200 million return of capital and the $375 million dividend.
In 2017, the transferee from 2012 paid the debtor almost $12 million. The liquidators distributed most of the cash to shareholders, reserving $500,000 to cover expenses in the New York suit. Judge Garrity said that the New York plaintiffs had received almost $400,000 in the distribution by the joint liquidators.
By June 2019, the cash held by the liquidators had dwindled to less than $300,000 when they decided that the debtor had become insolvent, in part due to expected future costs of the New York action. On the liquidators’ petition, the court in Bermuda converted the case to a court-supervised liquidation and continued the liquidators in their roles.
Meanwhile, the New York state court had dismissed the suit several times, but it had been reinstated on appeal repeatedly. By 2020, the plaintiffs were on their fifth amended complaint and facing another motion to dismiss, which the state court had not decided by the time Judge Garrity wrote his decision.
In September 2020, the liquidators filed the chapter 15 petition in New York, having received authorization from the court in Bermuda. The chapter 15 case was explicitly designed to halt the New York suit, which would occur automatically once the Bermudian liquidation was recognized as a foreign main proceeding under Sections 1515, 1517 and 1520. The plaintiffs objected to recognition of the Bermudian liquidation as a foreign main or foreign nonmain proceeding.
Liquidators’ Control Established COMI
The plaintiffs argued that the chapter 15 petition had been filed in bad faith to bar prosecution of the New York suit, where the debtor was only a nominal defendant that would suffer no damages. The plaintiffs also claimed that the chapter 15 petition amounted to forum-shopping.
Judge Garrity found that the liquidators had met all the requirements for foreign main recognition. His 39-page opinion is a compendium laying out the standards for winning foreign main recognition.
The plaintiffs contended that the debtor had no office, operations or assets in the U.S. to underpin the chapter 15 case in New York. To satisfy the Second Circuit’s requirement for assets in the U.S., Judge Garrity pointed to the retainer held in a trust account by the liquidators’ New York counsel.
The plaintiffs argued that Bermuda was not the debtor’s center of main interests, or COMI, as required by Section 1517(b)(1). When it was an operating company, the debtor’s operations and assets all had been in the U.S, the plaintiffs said. Furthermore, the debtor’s sole remaining asset was the New York suit, according to the plaintiffs.
Correct though the historical statements may have been, Judge Garrity pointed out how the affairs of the debtor had been managed in Bermuda by the liquidators since 2013. Furthermore, the debtor’s tangible cash assets were in Bermuda; the debtor had few or perhaps no creditors, and the plaintiffs were equity holders, not creditors.
Bad Faith Filing Not Considered
In a last effort at forestalling recognition, the plaintiffs argued that allowing chapter 15 relief would be “manifestly contrary to public policy of the U.S.” under Section 1506.
In that regard, Judge Garrity agreed that the “admittedly entire” purpose of the chapter 15 filing was “to prevent the New York Plaintiffs from continuing the New York Action.” However, he said, no one had argued “that the proceedings in Bermuda themselves are, by their nature, contrary to United States public policy.”
Judge Garrity therefore found “that this [public policy] exception is not met by a simple finding that the Chapter 15 Petition has been filed as a litigation tactic.” He declined “to import a good faith requirement into the determination of a main/nonmain proceeding.” The court, he said, has “limited discretion to deny recognition except when it would be manifestly contrary to the public policy of the United States.”
Judge Garrity therefore ruled that Bermuda was the COMI and that the liquidators were entitled to recognition of the proceedings in Bermuda as a foreign main proceeding.
The plaintiffs wanted Judge Garrity to give them relief from the automatic stay. Judge Garrity said he would consider a lift-stay motion “in due course,” after the plaintiffs have “properly moved for stay relief.” Otherwise, he said, “the application of the stay is mandatory upon a finding of a foreign main proceeding,” citing Section 1520(a)(1).
Writing an opinion that reads like a treatise, Bankruptcy Judge James L. Garrity, Jr. of New York granted foreign main recognition even when the purpose of the chapter 15 filing was to enjoin a shareholders’ suit in New York.
Contrasted to a chapter 11 case that can be dismissed if bankruptcy was a litigation tactic, Judge Garrity held that foreign liquidators are not held to the same standard when the issue is whether to grant foreign main recognition. That is to say, the standards for a legitimate chapter 11 filing are not imported onto gatekeeping functions in chapter 15.
The eventual import of Judge Garrity’s more relaxed approach to chapter 15 recognition is unclear because he left the door open to modifying the automatic stay on motion by the plaintiffs in the New York suit.