How Foreign Liquidators Can Gain Access to U.S. Courts
Recent decision benefits those seeking Chapter 15 relief.
Chapter 15 of the Bankruptcy Code provides a mechanism for a company in a foreign insolvency or debt-adjustment proceeding to seek injunctive relief against litigation in U.S. courts or U.S. bankruptcy court assistance in the administration and protection of its U.S. assets. To commence a Chapter 15 case, a petition seeking recognition of the foreign insolvency proceeding must be filed with a U.S. bankruptcy court. Such petition is filed by a foreign representative who is authorized in the foreign proceeding to administer the debtor's assets or to act as the debtor's representative. A request for provisional injunctive relief, such as a temporary restraining order, often accompanies the petition.
The first crucial issue in any Chapter 15 case is whether the foreign liquidators will be able to obtain recognition of the foreign proceeding and, if they do, whether such proceeding will be recognized as a foreign main or nonmain proceeding. The resolution of this threshold issue will determine whether the foreign liquidators can gain access to U.S. courts and seek Chapter 15 relief. A foreign proceeding qualifies as a foreign main proceeding if it is pending in the country where the debtor has its "center of main interests" or COMI. A foreign proceeding qualifies as a foreign nonmain proceeding if it is pending in a country where the debtor has an establishment, defined as any place of operations where the debtor carries out a nontransitory economic activity.
The Bankruptcy Code does not define the term COMI and courts have helped delineate the contours of the term. One of the leading cases on the issue of whether a foreign proceeding may be granted recognition is Bear Stearns.1 The case involved two investment funds which were exempted limited liability companies registered in the Cayman Islands. A Massachusetts company acted as the funds' administrator, registrar and transfer agent and provided day-to-day administrative services, such as accounting and clerical functions, maintaining shareholder registers and ledgers, distributing annual reports and responding to inquiries from shareholders and the general public. A New York investment management company managed the funds' assets, all of which were located in New York, except for approximately $15 million which was transferred to the Cayman Islands after the initiation of the Cayman Islands insolvency proceedings. Shortly thereafter, the liquidators appointed in the Cayman Islands petitioned the Bankruptcy Court for the Southern District of New York for recognition of the Cayman Islands proceedings as either foreign main or nonmain proceedings under Chapter 15 of the Bankruptcy Code. In conducting its COMI analysis, the bankruptcy court sought to determine "the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties." The bankruptcy court identified five critical factors to guide its COMI analysis: the location of the debtor's headquarters, the location of those who actually manage the debtor, the location of the debtor's primary assets, the location of the majority of the debtor's creditors (or of a majority of the creditors who would be affected by the case) and the jurisdiction whose law would apply to most disputes. Considering these factors, the bankruptcy court ruled that the Cayman Islands was not the funds' COMI because:
there are no employees or managers in the Cayman Islands, the investment manager for the Funds is located in New York, the Administrator that runs the back-office operations of the Funds is in the United States along with the Funds' books and records and prior to the commencement of the Foreign Proceeding, all of the Funds' liquid assets were located in United States.
The court noted that the only business activity that occurred in the Cayman Islands was the activity necessary to maintain the funds' registration in good standing and, therefore, denied recognition.
In the event recognition is not granted, the foreign representative may only obtain limited relief from U.S. courts. Specifically, §1509(f) of the Bankruptcy Code provides that:
the failure of a foreign representative to commence a case or to obtain recognition under this chapter does not affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor.
The strict definition of COMI established by the Bear Stearns court coupled with the limited relief afforded to foreign liquidators by the Bankruptcy Code in the event recognition is denied created complex issues relating to the ability of foreign liquidators to obtain relief from the U.S. courts in the absence of recognition.
The question thus arose whether Chapter 15 was the exclusive means for foreign liquidators to seek relief in the United States, which would potentially limit the foreign liquidators' access to U.S. courts. At least one district court answered this question in the affirmative. In Reserve International Liquidity Fund, a case in the U.S. District Court for the Southern District of New York,2 the court ruled that the British Virgin Islands (BVI) liquidators of a fund could not participate in the U.S. liquidation of the fund, which had assets and operations in the United States, even though the fund was incorporated in the BVI. The case concerned a money-market fund that had been liquidated. The fund filed an interpleader action in the district court to obtain a declaratory judgment to authorize the distribution of the fund's remaining assets. Certain investors of the fund, however, initiated a liquidation proceeding in the BVI where the fund was incorporated. The BVI liquidators sought to participate in the interpleader action and argued that, under BVI insolvency law, their appointment had in effect displaced the current fund's management, such that the liquidators were now in control of the fund. The district court ruled that "the Liquidators do not have standing to assume the position of the Fund's board in this action" and that, to appear and be heard in a court in the United States, the liquidators had to file a Chapter 15 petition and seek recognition of the BVI proceeding as a foreign main or foreign nonmain proceeding.
Applying the test established by Bear Stearns, the district court then concluded that the BVI liquidators could not obtain recognition of the BVI liquidation proceeding because the fund was managed in the United States, its assets were located in the United States and the fund's only connection with the BVI was that the BVI was its place of incorporation. As a result of this ruling, the BVI liquidators were unable to participate in the interpleader action and were prevented from gaining access to U.S. courts.