Interview: Have recent cases provided greater clarity as to what courts expect from non-US organisations under Chapter 15 proceedings?

Have recent cases provided greater clarity as to what courts expect from non-US organisations under Chapter 15 proceedings?

Nava Hazan, who is based in the New York office of Squire Patton Boggs where she is a partner in the restructuring and insolvency practice group, explains the goals, use and development of Chapter 15 proceedings.

 What are the goals of Chapter 15?

Chapter 15 is designed to provide a mechanism for a foreign representative in non-US insolvency proceedings to protect a debtor's US assets from US creditors' collection actions or to stay any litigation commenced in the US. The ultimate goal in a Chapter 15 proceeding is to preserve the value of the assets of a foreign debtor for the benefit of all of its creditors globally rather than them only being available to US creditors.

First, it prevents piecemeal (and potentially contrary) adjudication relating to the same insolvent estate. Secondly, it prevents inequitable distributions to creditors of the same estate located in different countries, which may otherwise receive different distributions based on local law. Finally, it encourages better cooperation between courts in different countries, with an eye toward a globally efficient administration of all of a foreign debtor's assets.

How can Chapter 15 be used defensively?

Chapter 15 can be used to stay litigation in the US against the debtor. Upon recognition of a foreign main proceeding, certain relief is imposed by operation of law--an automatic stay takes effect, certain sections of the Bankruptcy Code are made applicable, and the foreign representative is entitled to operate the debtor's business. The automatic stay imposed in a Chapter 15 proceeding does not have extraterritorial reach and only applies to assets in the US. Other examples of the defensive use of Chapter 15 include using it to stay execution on the debtor's assets located in the US or to protect the assets from creditors' attacks.

How can it be used offensively?

A debtor that has obtained a foreign court's approval of a plan of reorganisation may use Chapter 15 to bind US creditors to the plan's terms in certain circumstances. Chapter 15 may also be used to implement the sale of a debtor's assets located in the US and abroad if the court is satisfied that the standard for the sale of assets under the business judgment rule has been met. Due to jurisdictional and other limitations, it may be difficult for a debtor in the US to use the cash collateral of a foreign secured lender. Through a Chapter 15 proceeding, however, its use may be authorised. A foreign representative may also use Chapter 15 to conduct broad discovery in the US. Chapter 15 may also be used to offset claims or to implement claims resolution procedures for US creditors. The foreign representative may also use Chapter 15 to bring avoidance actions to challenge transactions which occurred in the previous two years under section 108 of the Bankruptcy Code.

What case law developments have there been over the last couple of years?

The 2nd US Circuit Court of Appeals, in Drawbridge Special Opportunities Fund LP v Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), recently determined that foreign debtors must have assets or a place of business in the US to be eligible to file a Chapter 15 case.

The 3rd US Circuit Court of Appeals analysed the debtor's property interest in assets for purposes of Chapter 15 in In re ABC Learning Centres, Ltd, 728 F.3d 301 (3d Cir. 2013). There, the debtor had only fully encumbered assets in the US. The debtor's lack of equity in the assets did not, however, remove them as property of the debtor or from the protection of the automatic stay. The court also determined that the public policy exception did not bar recognition of a foreign proceeding, even when the debtor's secured creditors in that proceeding would retain all the debtor's assets.

In re Millard, 501 B.R. 644 (Bankr. S.D.N.Y. 2013), the court determined that there was no good faith requirement for foreign proceeding recognition. Further, the debtor did not need to be insolvent to commence a Chapter 15 case, at least when insolvency was not a requirement under the foreign proceeding, despite the fact that the word 'insolvency' is included in the definition of 'foreign proceeding' in the Bankruptcy Code.

In another recent decision touching on the debtor's qualifications to file a Chapter 15, the 2nd Circuit determined that the Chapter 15 petition date should be the relevant date to determine the location of the debtor's COMI. The case of In re Fairfield Sentry Ltd, 714 F.3d 127 (2d Cir. 2013) shows that the debtor's COMI may be shifted prior to commencement of a Chapter 15 filing. Although debtors may now engage to some extent in pre-bankruptcy planning, the court warned that it would closely scrutinise debtors who attempt to manipulate their COMI before commencing a Chapter 15 case.

What is your reaction to Drawbridge?

The court's holding that a foreign debtor must have actual assets or a place of business in the US constitutes an additional requirement for a foreign debtor to file a Chapter 15 case. However, such requirement can be met relatively easily by, for example, paying money on account to his lawyers for their future professional fees or opening a bank account in the US. Most foreign representatives want to use Chapter 15 for the very reason that a foreign debtor has US assets so it will not often be a serious hurdle.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information on  Chapter 15 proceedings:

Recognition of foreign proceedings in the US under chapter 15 (Subscriber access only)

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Interviewed by Neasa MacErlean.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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