Why Two Facets of Chapter 15 Rulings Hinder Cross-border Insolvency Petitions in the United States
| Publication year | 2016 |
Why Two Facets of Chapter 15 Rulings Hinder Cross-Border Insolvency Petitions in the United States
Hardy DeLaughter
Chapter 15 of the United States Bankruptcy Code, in its first decade, provided considerable relief for foreign debtors and their representatives in the American judicial system. Eventually, though, various United States courts disagreed upon two matters that impacted whether foreign debtors were able acquire relief from the Bankruptcy Code. First, courts disagreed about whether § 109(a), governing who could be a debtor in United States courts, applied to chapter 15 petitions for recognition. Second, courts used two separate dates to determine the debtor's center of main interests, dealing with the level of connectedness to a country. Some courts chose the date of the petition for chapter 15 recognition; other courts looked further back and chose the beginning date of the foreign proceeding. For various reasons, § 109(a) was not supposed to apply to chapter 15 petitions, and the commencement date of the foreign proceeding was the correct date to determine a debtor's center of main interests.
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Since chapter 15 became part of the Bankruptcy Code, there has been an increase in annual filings under it.1 One might ask: Why are foreigners petitioning United States courts? For debtors and their foreign representatives, obtaining chapter 15 recognition of a foreign proceeding delivers great relief in the United States.2
There are several reasons to apply for chapter 15 recognition of a foreign proceeding, including the automatic stay and trustee powers.3 In one case, a foreign representative sought chapter 15 recognition because he wanted to prevent a creditor "from dissipating assets of [an] E-Trade account until final determination of the ownership thereof had been determined in the foreign proceeding.4
Chapter 15 allots automatic relief through 11 U.S.C. § 1520.5 Additionally, § 1521 grants a bankruptcy court discretion to provide supplementary relief that may be necessary to protect a debtor or its creditors.6 Supplemental relief covers a lengthy range from gathering evidence to examining witnesses, even to giving a foreign representative administrative powers over a debtor's assets.7 Once chapter 15 recognition has been granted to a foreign proceeding,
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§ 1507(a) permits a court to offer a foreign representative any additional support available in the Code or in any other United States law.8
Two topics among chapter 15 decisions have garnered opposing views in recent years. First, courts have speculated whether § 109(a), which governs who may be a debtor under the Code, applies to chapter 15 petitions.9 Second, courts have disagreed about when to determine a foreign party's center of main interests ("COMI"), which is a phrase dealing with a petitioner's level of connectedness to a foreign country.10 Some courts determine COMI on the chapter 15 petition date in the United States.11 Other courts, however, determine COMI by looking back to the petitioner's status at the beginning of the foreign proceeding (a "lookback period").12
This Comment proposes the following thesis: Chapter 15 recognizes bankruptcy's intricacies in a globalized age. Courts in such an age should hold that § 109(a) does not apply to chapter 15 and that COMI is determined through a lookback period to the commencement of the foreign proceeding.
A. Chapter 15's International Predecessors
During the twentieth century, European Community Member States were treaty-bound "to enter into negotiations with each other" regarding court recognition and enforcement of judgments from among the Member States.13 That duty inspired creation of the 1968 Brussels Convention on jurisdiction and judgment enforcement, which excluded insolvency proceedings but further developed cross-border cooperation among European courts.14 Between 1963
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and 1980, a committee of European Community experts drafted two proposals to regulate cross-border insolvency, but they never agreed on the proposals.15
International work toward the Model Law on Cross-Border Insolvency ("Model Law") accelerated with the European Union Convention on Insolvency Proceedings ("Convention").16 During the mid-1990s, a group of national experts developed the Convention, which was simpler and less rigid than its attempted predecessors.17 In November 1995, the Convention was finalized and ready to go into force, but the United Kingdom did not sign it by the required deadline.18 As a result, the Convention did not become law.19
Then, Germany and Finland reintroduced the failed Convention as the European Union Council Regulation on Insolvency Proceedings ("Regulation").20 That initiative drew authority from the 1997 Treaty of Amsterdam and converted the unsuccessful Convention into a regulation that binds all European Union Member States (except Denmark).21 The Convention's content was unaltered; only the legal status of the document changed.22
After decades of trying to create cross-border insolvency laws, Europe succeeded with the Regulation. Subsequently, the United Nations provided
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cross-border insolvency laws to the global community by using many of the Regulation's concepts.23
The United Nations Commission on International Trade Law ("UNCITRAL") Model Law was introduced to the United Nations on December 15, 1997, and the General Assembly accepted it on January 30, 1998.24 Since then, the United Nations has published and updated an enactment guide, produced in 2014 most recently.25 While the Model Law and the Convention—and the Regulation—are not identical completely, "the drafters of the Model Law consulted the Convention's terminology."26 As of 2016, forty-one nations have adopted the Model Law in forty-three jurisdictions.27 UNCITRAL's Working Group V (Insolvency Law) has proposed a change to
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the Model Law that will affect how courts determine COMI; this Comment discusses that proposal later.28
B. Chapter 15's History in the United States
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), which added chapter 15 to the Code.29 Congress adopted the Model Law as chapter 15 with very few changes.30
Simultaneously, BAPCPA repealed § 304,31 which was the former bankruptcy section that dealt with foreign proceedings.32 In its entirety, § 304 conveyed a broad generality about cases ancillary to foreign proceedings and contained slightly more than 250 words, whereas chapter 15 is intricate and has over five thousand words.33 A corresponding Senate report to § 304 confirms a preference for simplicity by stating that the guidelines were "designed to give the court the maximum flexibility in handling ancillary cases."34
C. Chapter 15's Relevant Provisions in the Bankruptcy Code
Section 1501 declares that the purpose of chapter 15 "is to incorporate the Model Law . . . to provide effective mechanisms for dealing with cases of cross-border insolvency."35 Among its objectives are fairness, efficiency, and cooperation between United States courts and courts in other nations.36 To accomplish those objectives, § 1501 applies to several specified categories,
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including when assistance is sought by a foreign court or a foreign representative and when cases are pending concurrently in the United States and abroad.37
Interestingly, § 1501 states that it does not apply to § 109(b) and (e), but this Comment focuses heavily on whether nearby § 109(a) applies to chapter 15 cases.38 Section 109(a) states that a debtor must be "a person that resides or has a domicile, a place of business, or property in the United States, or a municipality."39
When a debtor seeks chapter 15 status, he turns to § 1515, which contains the rules to applying for recognition of the foreign proceeding.40 In this scenario, "[a] foreign representative applies to the court for recognition of a foreign proceeding in which the foreign representative has been appointed."41 Various documents accompany the application, including one that identifies all judicial proceedings in which the petitioner is involved outside of the United States.42 If a court believes that § 1515's requirements are met, then it will grant recognition of the foreign proceeding under § 1517.43
Finally, § 1508 guides any court that interprets chapter 15.44 The section directs that "the court shall consider [chapter 15's] international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions."45
Multiple circuits disagree about two issues in current chapter 15 case law: (1) the applicability of § 109(a) to chapter 15; and (2) the proper time to
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determine COMI in a cross-border insolvency case. This Comment discusses two sides of each issue, respectively, and concludes that § 109(a) does not apply to chapter 15 and that COMI is determined through a lookback period to the commencement of the foreign proceeding.
A. Section 109(a) Requirements in the United States
Section 109(a) requires a person petitioning for bankruptcy to reside or have a domicile, a place of business, or property in the United States.46 Regardless of whether Congress considered how this section affects chapter 15, a question emerges: Does § 109(a) apply to cases filed under chapter 15 of the Code? The following subsections discuss how courts have addressed that question in recent years, concluding that § 109(a) does not apply to chapter 15 recognition petitions.
1. Section 109(a) Applies to Chapter 15
Even though chapter 15 became part of the Code in 2005, courts did not address whether general provision § 109(a) applies to chapter 15 proceedings until late 2013.47 In December 2013, the Second Circuit addressed § 109(a)'s...
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