Respected Conclave Proposes Important Revisions to Chapter 15 of the U.S. Bankruptcy Code

Mainbrace | March 2016 (No. 2)

Michael B. Schaedle

Chapter 15 of the U.S. Bankruptcy Code enacts the Model Law (the “Model Law”) on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law, which has been adopted by the United States and 40 other countries. Chapter 15 is designed to enable international reorganization by creating a straightforward means by which foreign debtors can access the American judicial and bankruptcy system to assist foreign courts in their work in reorganizing, rehabilitating, and liquidating those debtors with cross-border interests, including in the United States.

Since its inclusion in the Bankruptcy Code in 2005, experience and precedent in respect of chapter 15 ancillary relief has developed. This experience and precedent has led an eminent conclave of American bankruptcy judges, academics, and lawyers, the National Bankruptcy Conference (the “Conference”), to suggest certain reforms in respect of chapter 15 to the United States Senate’s Committee on the Judiciary and the United States House of Representatives’ Subcommittee on Regulatory Reform, Commercial and Antitrust Law.

While the prospects for chapter 11 and 15 reform are uncertain (particularly in a presidential election season), the American Bankruptcy Institute recently undertook a broad-ranging study of necessary reforms to the bankruptcy law and reported to Congress in 2015, stimulating interest in bankruptcy reform. Accordingly, it is important to be aware of key points raised by the Conference on chapter 15, as the Conference will be influential in any possible American bankruptcy reform process. This note focuses on major proposed changes that could impact maritime finance and commerce importantly.

Foreign Debtors Need Not Comply with 11 U.S.C. §109(a)

The Second Circuit Court of Appeals in In re Barnet, 737 F.3d 238 (2d Cir. 2013) interpreted section 103 of the U.S. Bankruptcy Code to mean that Bankruptcy Code section 109(a) applied to foreign debtors under chapter 15. Bankruptcy Code section 109(a) sets forth eligibility requirements to be a debtor under the Code; specifically, having a place of business or property in the United States.

While Second Circuit bankruptcy courts have interpreted this eligibility requirement broadly, finding that an attorneys’ retainer or contract rights under a New York law governed indenture to be a sufficient quantum of property for exam- ple (see In re Berau Capital Resources Pte Ltd., 2015 WL 6507871 (Bankr. S.D.N.Y. 2015)), other courts, including the influential Delaware bankruptcy court in the Third Circuit, have found that chapter 15 at Bankruptcy Code section 1517 establishes its own requirements for eligibility that are more specific than Bankruptcy Code section 109(a) and that are not dependent on the existence of a place of business or property in the U.S.  See In re Bemarmara Consulting A.S., slip op., Case No. 13-13037 (Bankr. D. Del., Dec. 17, 2013).

The Conference says that Barnet is “wrong.” Barnet, in the view of the Conference, invites stakeholders to challenge chapter 15 process on grounds inconsistent with the straight-forward requirements for recognition that drive 15 and the Model Law, while muddying the relevant venue law. It pro- poses that Congress revise Bankruptcy Code section 109(a) to make clear that it is inapplicable in a chapter 15 case.

Conversely, Abstention in a Plenary Case under Chapter 7 or 11 Should Be Permitted Where a Debtor Does Not Have Its Center of Main Interests in the U.S. and the Court Cannot Effectively Control the Debtor or Its Main Assets

The relative modest “eligibility” requirements discussed above easily create U.S. jurisdictional ties, enabling a company with its offices overseas to raise a plenary case here in the United States under either chapter 7 or 11. The Conference does not suggest that the eligibility test should change because, as is often the case in maritime matters, certain sorts of businesses can office overseas and yet have important intangible connections to the U.S. markets, financial or otherwise, which justify reorganization in the United States.

Nevertheless, it advised Congress that the result of easy eli- gibility is that “any debtor based in any country in the world can come to the United States to conduct its liquidation or reorganization, even if its assets, creditors and business are mostly outside the United States.”  This, in the view of the Conference, can place the American bankruptcy system in the position of having the responsibility to administer the affairs of a debtor and the assets of a debtor where both the debtor and those assets are outside of the effective control of the bankruptcy court.

At present, in extraordinary circumstances, a bankruptcy court can abstain from administering a chapter 11 case, dismissing same when the dismissal is in the best interests of both the debtor and its creditors. 11 U.S.C. §305(a)(1); see also In re Northshore Mainland Services, Inc., et al., 537 B.R. 192 (Bankr. D. Del. 2015) (dismissing a chapter 11 under Bankruptcy Code section 305(a) where all property of the subject debtor was located in the Bahamas, the government in the Bahamas had an important public interest in the development of the property, and a fair collective remedy was available to the debtor in the Bahamas). While the existing abstention law can provide a court with a general basis to address inappropriate filings by foreign debtors in the United States, the extraordinary nature of the remedy as generally drawn, in the view of the Conference, “attenuates” the utility of the absention remedy.

Accordingly, the Conference suggests that Congress amend Bankruptcy Code section 305(a)(1) to specify that abstention and dismissal is appropriate at the bankruptcy court’s discretion if a debtor does not have its center of main interests in the United States and the bankruptcy court cannot exercise effective control over the debtor or its material assets. This would render the plenary bankruptcy process consistent with section 1528 of the Bankruptcy Code, which only permits a foreign representative to file a plenary proceeding in the United States after recognition, and then, only where the foreign debtor has U.S. assets.

Likewise, the Conference urged a revision to the statute to enable suspension of bankruptcy court administration over part of a case, but to retain power over part of the case. The bankruptcy court could then continue effective administration over U.S. assets of a foreign debtor that initiated a plenary proceeding in the United States, tailoring abstention to better enhance chances of international reorganization while doing proper comity to foreign laws, courts, interests, and processes.

A Foreign Debtor’s “Center of Main Interest” Should Be Determined as of the Commencement of the Foreign Proceeding, Not as of the Chapter 15 Case’s Commencement

Bankruptcy Code section 1502 and section 1517 defines a “foreign main proceeding” as a proceeding in the country where the foreign debtor “has” its center of main interests or “COMI.” “COMI” exists where the foreign debtor has its financial and legal nerve center. Accordingly, the Second Circuit has ruled that “COMI” should be determined as of the date of chapter 15 commencement. In re Fairfield Sentry, 714 F. 3d 127 (2d 2013). Likewise, sections 1502 and 1507 require a “foreign non-main proceeding” to be in a country where the foreign debtor has an establishment, or a tangible locus of economic activity.

This Second Circuit interpretation is arguably inconsistent with the Model Law, which has been publicly and formally interpreted by its enactors in guidance to mean that the COMI/establishment determinations should be made as of the time the foreign proceeding commenced. The Conference finds that the Model Law enactors’ interpretation makes sense. Chapter 15 can be attempted after a foreign debtor has ceased operating or has been succeeded formally by a reorganized entity. In such contexts, the Fairfield Sentry “present tense” focused test can make it more difficult to find COMI or an establishment in the jurisdiction where the foreign proceeding was filed and where the foreign debtor actually had its locus of tangible or central economic activity.

The Conference views recognition of a follow on liquidation proceeding as a foreign main or non-main proceeding as a possible distortion of the Model Law and chapter 15 because the liquidation might not have any real nexus to a place where the debtor had a tangible economic presence. Accordingly, the Conference urged modifications to both Bankruptcy Code section 1502 and 1517 to confirm that COMI should be determined as of the time the foreign proceeding commenced.