LexisNexis

Cross-border insolvency and United States assets

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John J. Kenney
Hoguet, Newman, Regal & Kenney, United States
jkenney@hnrklaw.com

John P. Curley
Hoguet, Newman, Regal & Kenney, United States
jcurley@hnrklaw.com

Helene R. Hechtkopf
Hoguet, Newman, Regal & Kenney, United States
hhechtkopf@hnrklaw.com

Emily Hogan Long
Hoguet, Newman, Regal & Kenney, United States
ehogan@hnrklaw.com

The arrival of the COVID-19 pandemic and the consequent economic recession it has caused is expected to lead to a surge in bankruptcies worldwide. Even litigators who do not practice bankruptcy should be aware of how a bankruptcy proceeding may affect their clients.  Defence counsel may need to assess the options of a client facing a judgment, while plaintiff’s attorneys may need to counsel clients about the effect a bankruptcy filing can have on their claims.[1]

A business that begins an insolvency process in another country can also access the United States Bankruptcy Courts if it has assets within the US through Chapter 15 of the US Bankruptcy Code (Chapter 15).[2] Chapter 15 is a new and underutilised tool for debtors outside the US. Under Chapter 15, the US Bankruptcy Court is empowered to grant substantial relief to facilitate the foreign bankruptcy process.

Chapter 15 is relatively new, having been enacted in 2005, and it is modeled on the United Nations Commission On International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. It is designed to:

  • promote cooperation between courts of the US and foreign insolvency courts;

  • provide greater legal certainty for trade and investment;

  • the fair and efficient administration of cross-border insolvencies;

  • the protection of debtors’ assets; and

  • to facilitate the rescue of financially troubled businesses.[3]

Steps in the process

For a debtor outside the US, beginning a proceeding under Chapter 15 is a straightforward process. The debtor’s ‘foreign representative’ must file a petition in bankruptcy court, commonly in Manhattan, New York or Wilmington, Delaware, asking the court to recognise the debtor’s foreign insolvency proceeding.[4] A ‘foreign representative’ is defined in the Bankruptcy Code as any person or body ‘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.’[5] While the petition for recognition is pending, the court may grant provisional relief including staying execution against the debtor’s US assets and entrusting the administration of those assets to the foreign representative.[6]

The bankruptcy court must recognise the foreign bankruptcy proceeding if the debtor is the subject of a foreign proceeding and has assets in the US.[7] A foreign company need not have substantial US assets to be recognized under Chapter 15.

Next, the court will recognise the foreign proceeding as either ‘foreign main’ or ‘foreign nonmain.’ A foreign main proceeding is a one pending in a jurisdiction where the debtor has the center of its main interests (COMI).[8] Non-main proceedings are those in jurisdictions where the debtor merely has an ‘establishment’ or some permanent economic activity.[9] The recognition of a foreign main proceeding entitles the debtor to certain relief that would be discretionary if the court recognised a foreign non-main proceeding. For example, when a bankruptcy court recognises a foreign main proceeding, an automatic stay (a temporary injunction preventing creditors from collecting against the debtor or its assets) attaches to the debtor’s property in the US and the foreign representative may operate the debtor’s business and may exercise the rights and powers of a trustee.[10]

Once the bankruptcy court has recognised a foreign proceeding, whether foreign main or foreign non-main, the court may grant ‘any appropriate relief’ to protect the debtor’s assets or creditor’s interests,[11] such as:

  • a stay of execution against the debtor’s assets (to the extent a stay did not automatically attach);

  • entrusting the administration of all US assets to the foreign representative; or

  • almost any additional relief that may be available to a trustee.[12]

In both foreign main and foreign non-main proceedings, this tool can be useful to foreign debtors in either of two situations: where the debtor has US assets to protect, or where it is necessary to search for and freeze US assets. First, where a foreign debtor has assets in the US, the bankruptcy court’s automatic stay will keep those assets out of the hands of creditors.

Second, where the foreign debtor finds it necessary to search for and include US assets to bring them within the US proceeding, the foreign representative (usually represented by a US law firm) can conduct a search for and freeze assets to bring them within the US proceeding. Indeed, one of the key features of Chapter 15 is that it allows for broad, US-style discovery in locating assets which should be in the insolvency proceeding, including depositions of witnesses (oral questioning under oath of witnesses with a verbatim transcript of the proceeding), written document demands and written interrogatories. Furthermore, the bankruptcy courts can provide ‘additional assistance’ to the foreign representative pursuant to 11 United States Code (USC), section 1507(a). One US appellate court has interpreted 11 USC, section 1507(a) to provide for ‘extraordinary’ relief not otherwise available under the Bankruptcy Code.[13]

The recent case In re Olinda Star Ltd[14]shows how a Chapter 15 proceeding can benefit a foreign debtor. Olinda, the owner of an offshore drilling rig, had an ongoing restructuring proceeding in the British Virgin Islands (BVI). It filed a petition under Chapter 15 in federal bankruptcy court in New York seeking recognition of the BVI proceeding.

Before Olinda filed its Chapter 15 petition, Olinda’s creditors had approved its reorganisation scheme in the BVI, which replaced noted guarantees by Olinda with new notes with enhanced collateral, additional restrictive covenants, and a higher interest rate. Creditors unanimously approved the scheme, and the BVI court approved it.

In its decision granting recognition, the New York court first looked at whether Olinda was a foreign debtor that could be protected under the US bankruptcy statute. The US bankruptcy law states that, to be a debtor under US law, a foreign entity must prove that it ‘resides or has a domicile, a place of business, or property in the US.’[15] The court found that this requirement was satisfied because Olinda had a client account with a balance of $1,000.67 with the US law firm White & Case. In addition, the notes guaranteed by Olinda were governed by a New York law indenture, which contemplated New York law as the venue for disputes, and the New York Bankruptcy Court has held that a debtor’s contract rights containing a New York forum selection clause can constitute intangible property for the purpose of satisfying 11 USC, section 109(a).[16]

The next question presented to the court was whether the BVI was Olinda’s COMI and therefore whether the BVI proceeding was a foreign main proceeding. The bankruptcy statute does not define ‘center of main interests,’ but 11 US,. section 1516(c) provides a rebuttable presumption that it is the debtor’s registered office. The Bankruptcy Court in New York applied a five-factor test to determine COMI:

  • the location of the debtor's headquarters;

  • the location of those who actually manage the debtor (which, conceivably could be the headquarters of a holding company);

  • the location of the debtor's primary assets;

  • the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case; and/or

  • the jurisdiction whose law would apply to most disputes.[17]

Though Olinda principally conducts its business on the high seas, the court found its COMI was BVI because its registered office was in BVI and there was no evidence to support finding its COMI elsewhere.

Olinda requested that the court grant the BVI bankruptcy scheme full force and effect in the US. The court found it was empowered to do so under 11 USC, section 1521(a), which governs relief that may be granted upon recognition and gives the Bankruptcy Court very broad discretion:

‘since a court may grant any appropriate relief that would further the purposes of chapter 15 and protect the Debtor's assets and the interests of creditors, provided that the interests of creditors and other interested entities are sufficiently protected.’[18]

Furthermore, the court noted it was empowered to grant any ‘additional assistance’ under section 1507.[19] The court found it appropriate to enforce the BVI bankruptcy plan in the US because the US and BVI share common-law traditions emphasising procedural fairness, and creditors received notice of the BVI proceeding and had a full and fair opportunity to be heard in the BVI hearing, consistent with US due process.[20]

In addition, the court issued a permanent injunction against any act that would undermine the BVI insolvency proceeding. It found there was an imminent threat of irreparable harm to Olinda absent an injunction because parties could seek to enforce the accelerated prior notes that were replaced in the BVI scheme, jeopardising the company.[21]

Conclusion

Foreign companies entering bankruptcy should consider whether they might benefit by availing themselves of the US bankruptcy law. The best course of action would be to consult a knowledgeable attorney in the US to determine whether the foreign entity has sufficient assets to be protected by US bankruptcy law and what to expect from a bankruptcy court. While Chapter 15 is underutilised given the current global economic uncertainty, it is likely that more companies will avail themselves of it in the future.


[1]Cathy Moran, ‘What Litigators Need To Know About Bankruptcy’ (Bankruptcy Soapbox, accessed 26 October 2020). Seewww.bankruptcysoapbox.com/litigation-bankruptcy/.

[2]See 11 USC. Chapter 15: Ancillary and Other Cross-Border Cases.

[3]See In re ABC Learning Cntrs. Ltd., 728 F.3d 301, 305–06 (3d Cir. 2013).

[4]11 USC. s 1504; 11 USC. s 1515; In re Toft, 453 B.R. 186, 189–90 (Bankr. S.D.N.Y. 2011).

[5]Ibid s 101(24).

[6]11 USC. s 1519(a).

[7]Ibid s 1502; 11 USC. s 1517.

[8]Ibid s 1502(4).

[9]Ibid s 1502(2).

[10]Ibid s 1520(a)(1), (a)(3).

[11]Ibid s 1521(a).

[12]Ibid s1521(a)(2-7).                                                                                                               

[13]See In re Vitro S.A.B. de CV, 701 F.3d 1031, 1057 (5th Cir. 2012) (finding that releasing a non-debtor’s liability would be considered such extraordinary relief).

[14]614 B.R. 28 (Bankr. S.D.N.Y. 2020).

[15]Ibid at 39 (quoting 11 USC. s 109(a)).

[16]Ibid at 40.

[17]Ibid at 41.

[18]Ibid at 46 (quoting In re Atlas Shipping A/S, 404 B.R. 726, 740 (Bankr. S.D.N.Y. 2009) (internal quotation marks omitted)).

[19]Ibid at 47.

[20]Ibid

[21]Ibid at 48.

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