CHAPTER 3, A. Chapter 15 Primer: Learning the Global Chess Game

• Jurisdiction: United States

A. Chapter 15 Primer: Learning the Global Chess Game

ABI Journal

April 2019

Joao F. Magalhaes

Inglesino, Webster, Wyciskala & Taylor, LLC

Parsippany, N.J.

For many bankruptcy and restructuring practitioners, the procedures underlying chapter 15 of the Bankruptcy Code are largely unfamiliar. Depending on the locale of one's practice, chapter 15 cases are rarely encountered. This article provides a base level of familiarity though a brief discussion of recent cases addressing debtor eligibility and foreign case recognition concepts under chapter 15. Also, given the state of international relations and recent events, attention is increasingly being given to the issue of how courts might address allegations of corruption abroad.

Chapter 15 Overview

Chapter 15, enacted pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAP-CPA), incorporated the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (UNCITRAL).¹ Unlike other chapters of the Bankruptcy Code, chapter 15 features an express statement of purpose, at § 1501(a), setting forth objectives such as (among others) cooperation between U.S. courts/authorities and those of foreign countries involved in cross-border insolvency cases.² "A central tenet of Chapter 15 is the importance of comity in cross-border insolvency proceedings."³

A chapter 15 case is commenced by the filing of a petition for recognition of a foreign proceeding under § 1515.⁴ The petition must be filed by a "foreign representative," which is "a person or body, including a person or body appointed on an interim basis, 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

Following notice and a hearing, recognition of the foreign proceeding shall be entered if (1) the "foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning" of § 1502, (2) "the foreign representative applying for recognition is a person or body," and (3) § 1515 is satisfied.⁶ Upon recognition, the automatic stay of § 362 of the Bankruptcy Code is triggered and made applicable pursuant to § 1520(a)(1), and the foreign entity represented might pursue various types of relief afforded by, among other provisions, § 1521.⁷

Eligibility Concerns: Evaluating "Property" of a Foreign Debtor

Section 109(a) of the Bankruptcy Code establishes a baseline eligibility standard by providing that "only a person that resides or has a domicile, a place of business, or property in the United States ... may be a debtor under this title."⁸ The U.S. Court of Appeals for the Second Circuit applied § 109(a) to chapter 15, holding that before a bankruptcy court may grant recognition of a foreign proceeding, the debtor must meet the requirements of § 109(a).⁹ The Second Circuit's reasoning was straightforward: Section 103(a) provides that chapter 1 applies to chapter 15.¹⁰

With § 109(a) being deemed applicable to chapter 15, the analysis often segues to the type and extent of property required to support recognition in chapter 15 cases. For example, in In re B.C.I. Finances Pty. Ltd., the U.S. Bankruptcy Court for the Southern District of New York (SDNY) addressed § 109(a)'s property requirement in a matter involving debtors in Australian liquidation proceedings who were part of an intercompany borrowing and lending group whose principals had left Australia, with two taking up residence in New York.¹¹ The liquidators appointed in those proceedings, acting as foreign representatives, sought recognition under chapter 15 to facilitate the administration of the debtors' estates in Australia.

In particular, the liquidators, in their search for assets, sought a means by which to obtain discovery against the principals who had moved to New York.¹² A related nondebtor entity and one of the debtors' principals objected on the basis of § 109(a).¹³ Prior to seeking recognition, however, the foreign debtors had each placed retainers of $1,250 in the trust account of the liquidators' counsel, and contended that the placement of such funds satisfied § 109(a).¹⁴

Relying on prior case law, including Poymanov (discussed herein),¹⁵ the court concurred with the foreign debtors and their representatives, holding that retainer funds deposited by foreign debtors in a trust account located in the U.S. to pay for the foreign representatives' counsel constituted property located within the U.S. for purposes of satisfying § 109(a)'s eligibility requirement.¹⁶ The court observed that "[a]s a general matter, courts that have construed the 'property' requirement in Section 109 'with respect to foreign corporations and individuals have found the eligibility requirement satisfied by even a minimal amount of property located in the United States.'"¹⁷ The court collected additional case law to emphasize how even nominal amounts of property enable a foreign corporation to qualify under § 109(a).¹⁸

The B.C.I. court also considered the liquidators' assertion that additional property of the debtors under § 109(a) was furnished by existing breach-of-fiduciary-duty claims in the U.S. against the principals.¹⁹ The court agreed, but noted the parties' disagreement as to where such claims were located, and what law to apply in making such a de-termination.²⁰ The court noted that "the nature or scope of a debtor's interest in property is determined by 'local' or 'state' law," and that under New York choice-of-law rules, Australian law should govern the fiduciary duty claims given the strong connections to Australia.²¹ As to the location of the claims, the court cited the liquidators' argument that "as a general matter, where a court has both subject-matter and personal jurisdiction, the claim subject to the litigation is present in that court."²² Applying these principles, the court concluded that the fiduciary-duty claims were located in New York and governed by Australian law.²³

Determining the "Main" Foreign Proceeding

In addition to threshold eligibility determinations, a chapter 15 petition for recognition will necessarily require analysis as to the nature of the foreign proceeding to be recognized. Given how global entities have interests in many jurisdictions, the analysis can become complicated if multiple petitions for recognition are presented in connection with the same debtor.

This was the scenario in In re Oi Brasil Holdings Coöperatief UA, which involved a petition seeking not only the recognition of one foreign bankruptcy proceeding, but also the modification of a prior recognition order finding a foreign main proceeding to be...