CHAPTER 3, E. Judge, I've Got a Feeling We're Not in Kansas Anymore (or Moscow, Either)

• Jurisdiction: United States

E. Judge, I've Got a Feeling We're Not in Kansas Anymore (or Moscow, Either)

ABI Journal

March 2019

Raymond M. Patella

Kraemer Burns, PA

Springfield, N.J.

The issues arising from distressed and insolvent businesses and individuals are increasingly crossing countries' borders with corresponding issues of comity among the various countries with jurisdiction over a debtor's assets. Chapter 15 of the U.S. Bankruptcy Code is Congress's attempt to harmonize and recognize other countries' insolvency proceedings in this country and permit the representative of the foreign insolvency to come to the U.S. and seek specific relief over assets located within the U.S., among other things.

However, what should a U.S. bankruptcy court do when that foreign representative comes to this country with an insolvency proceeding of an individual when it is not readily apparent what country that individual resides in? Remarkably, the case law on the issue is scarce, but one bankruptcy court was recently confronted with that issue and provided guidance to practitioners.¹

Procedural and Factual Background

In In re Pirogova, Hon. Shelley C. Chapman addressed the issue of how to determine the center of main interest (COMI) for an individual debtor in a chapter 15 case. The debtor, Natalia Pirogova, was born in Belarus, is a Russian citizen and is the holder of a "green card" that affords her permanent resident status in the U.S.² She was the subject of an insolvency proceeding under the Russian Federation Federal Law in Moscow (the "Russian proceeding"), and the court overseeing that matter appointed Yuri Rozhkov as the trustee and foreign representative in the Russian insolvency case.³

While the Russian proceeding originated as a debt restructuring, it was converted on Oct. 6, 2016, to the Russian equivalent of a liquidation in which the foreign representative was appointed to liquidate Pi-rogova's assets.⁴ The foreign representative then proceeded to file on March 30, 2018, a chapter 15 case in the Southern District of New York (the "U.S. proceeding") as a case ancillary to the Russian proceeding, seeking recognition of the Russian proceeding in the U.S. as a "foreign main proceeding," or alternatively, as a "foreign nonmain proceeding."⁵ Substantively, the foreign representative sought in the U.S. proceeding the authority and permission to administer Pirogova's assets located within the U.S. for the benefit of creditors in the Russian proceeding.

Early on in the U.S. proceeding, the bankruptcy court granted provisional relief and issued a temporary restraining order that, among other things, stayed actions against Pirogova and her property in the U.S.⁶Opposition to the chapter 15 petition was filed by several parties, including Pirogova.⁷ Over two days in late September 2018, the U.S. bankruptcy court held a trial and heard testimony from several witnesses and arguments from counsel.

The foreign representative alleged that Pirogova had an outstanding warrant for her arrest in Russia, made secret trips to Russia by way of the border between Russian and Belarus, committed fraud and had failed investments in Russia, and had outstanding debts in both Russia and the U.S.⁸ The foreign representative asserted that Pirogova's mere presence in the U.S. perpetrated a continuing fraud on her creditors and was a backdoor attempt to shield her assets located in the U.S.⁹ Pirogova disputed the foreign representative's contentions.¹⁰

Court's Legal Discussion

The Pirogova court then went into its legal analysis. First, it noted that chapter 15 provides that "recognition" is the "entry of an order granting recognition of a foreign main proceeding or foreign nonmain proceeding."¹¹ Section 1517(a) of the Bankruptcy Code provides that a foreign proceeding will be recognized in a chapter 15 case if:

(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding with the meaning of § 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the petition meets the requirements of § 1515.¹²

Section 1517(b) further provides that a foreign proceeding shall be recognized

(1) as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; or
(2) as a foreign nonmain proceeding if the debtor has an establishment within the meaning of § 1502 in the foreign country where the proceeding is pending.¹³

Section 1502 of the Bankruptcy Code defines the terms "foreign main proceeding" and "foreign nonmain proceeding," and essentially mirrors the language in § 1517(b).¹⁴ Only a foreign proceeding that is either a foreign main or nonmain proceeding is entitled to be recognized under chapter 15.¹⁵ The burden of proving whether a foreign proceeding meets the requirements for recognition under chapter 15 lies with the party seeking recognition — in this case, the foreign representative.¹⁶

The definitions set forth in § 1502 and the language in § 1517(a) suggest that the substantive difference between a "foreign main proceeding" and a "foreign nonmain proceeding" is the extent of the putative debtor's connection to the foreign jurisdiction: In the former, the debtor must have its COMI, while in the latter, the debtor must only have "an establishment." Upon recognition of a foreign proceeding, the relief that could be granted is set forth in § 1521 of the Bankruptcy Code and is largely the same whether the proceeding is recognized as "main" or "nonmain." However, the primary distinction between the two is set forth in § 1521(d), which requires the court, in granting relief to a representative of a nonmain foreign proceeding, be "satisfied that the relief relates to assets that, under the law of the United States, should be administered in the foreign nonmain proceeding or concerns information required in that proceeding."¹⁷

Could the Court Find a Foreign Main Proceeding?

A foreign main proceeding means a foreign proceeding other than a foreign main proceeding pending in the country where the debtor has its COMI.¹⁸ Thus, the Pirogova court noted that the sole criterion for determining whether a proceeding is a foreign main proceeding is the debtor's COMI.¹⁹ For purposes of making this determination, the court found that the relevant time period for determining a debtor's COMI is the chapter 15 petition date, unless the court finds that the debtor has manipulated its COMI in bad faith.²⁰

Earlier Decisions: The Fifth Circuit in In re Ran addressed recognition of a foreign proceeding where the debtor's COMI was disputed.²¹ In Ran, almost 10 years after his appointment, an Israeli receiver sought recognition in the U.S. of a foreign proceeding pending in Israel.²² The Fifth Circuit affirmed the lower court's decision denying recognition of the foreign proceeding on the basis that the putative debtor in the case had no COMI in Israel, as he had left Israel 10 years earlier, moving to Houston and never returning to Israel.²³ The debtor was also a legal permanent U.S. resident, and his spouse and children were U.S. citizens.²⁴

The Fifth Circuit further rejected the receiver's arguments that the court should find that the debtor's COMI lies in Israel because the debtor's creditors were there, his assets were being administered there, and his...