A bankruptcy proceeding abroad for a foreign “branch” of a U.S. bank isn’t eligible for recognition under chapter 15, even if the banking business has terminated abroad and foreign liquidators have been appointed, for reasons explained by Bankruptcy Judge Martin Glenn of New York.
Judge Glenn was importuned to write his February 22 opinion in the wake of the insolvency of Silicon Valley Bank, which led to the appointment of the FDIC as receiver in March 2023. The bank had a branch in the Cayman Islands.
The branch was not separately incorporated. Although licensed to do business in the Caymans, the branch was prohibited from taking deposits from residents of the island. There were no officers or employees in the Caymans, only a mail drop.
The Federal Reserve exercised its discretion to declare a “systemic risk exception” allowing the FDIC to pay all depositors in full, not just the ordinary limit of $250,000 per account. The FDIC determined that deposits of $476 million at the Caymans branch were not eligible for payment from FDIC insurance. Instead, the FDIC declared that the branch’s depositors would have unsecured claims in the FDIC receivership.
Realizing they would not be paid by the FDIC, some of the branch’s depositors initiated winding-up proceedings in the Cayman Islands. The court in the Caymans appointed liquidators who applied for foreign main recognition in New York under chapter 15.
The FDIC opposed recognition and won.
Judge Glenn described the FDIC as having raised a “gating issue” regarding the branch’s eligibility to be a chapter 15 debtor.
To the point, Section 1501(c) provides that chapter 15 “does not apply to — (1) a proceeding concerning an entity . . . identified by exclusion in section 109(b).” Of course, Section 109(b) says that a debtor under the Bankruptcy Code may not be, among other things, “a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, . . . credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act.”
Citing the Collier treatise, Judge Glenn said, “Chapter 15 does not apply to entities that are ineligible for relief under section 109(b).” He also quoted Collier as saying: “[F]oreign representatives of foreign banks which are subject to foreign proceedings will not be eligible for Chapter 15 recognition if the foreign banks have a branch or agency in the United States.”
In addition, Judge Glenn cited the Second Circuit for holding that Section 109 applies to chapter 15 cases.
The liquidators vied for chapter 15 recognition, contending that they were not acting as a bank and that foreign banks have been held eligible for chapter 15 recognition. Judge Glenn distinguished authorities proffered by the liquidators, saying that a case in Delaware involved an Irish bank that “did not have a branch or agency in the U.S. as required under section 109(b)(3)(B) at the time of its Chapter 15 petition filing.” In re Irish Bank Resolution Corp. Ltd., 538 B.R. 692 (D. Del. 2015).”
Judge Glenn said that the branch in the case before him “possessed no separate legal existence outside of the [U.S.] Bank, which was indisputably U.S.-incorporated and ineligible for bankruptcy relief pursuant to section 109(b)(2) as a domestic FDIC-insured bank.”
Judge Glenn dismissed the chapter 15 petition, holding that the branch “remains, for all intents and purposes of this proceeding, what Silicon Valley Bank has always been — a bank that is ineligible to be a debtor under the Bankruptcy Code.
A bankruptcy proceeding abroad for a foreign “branch” of a U.S. bank isn’t eligible for recognition under chapter 15, even if the banking business has terminated abroad and foreign liquidators have been appointed, for reasons explained by Bankruptcy Judge Martin Glenn of New York.
Judge Glenn was importuned to write his February 22 opinion in the wake of the insolvency of Silicon Valley Bank, which led to the appointment of the FDIC as receiver in March 2023. The bank had a branch in the Cayman Islands.
The branch was not separately incorporated. Although licensed to do business in the Caymans, the branch was prohibited from taking deposits from residents of the island. There were no officers or employees in the Caymans, only a mail drop.