US - Chapter 15: Overview of Recognition and Enforcement
Enacted in 2005, Chapter 15 of the US Bankruptcy Code (Chapter 15, and the Bankruptcy Code, respectively) is based on the Model Law on Cross-Border Insolvencies promulgated by the United Nations Commission on International Trade Law (the UNCITRAL Model Law).1 Chapter 152 is designed to ‘provide effective mechanisms for dealing with cases of cross-border insolvency’, by, inter alia, encouraging cross-jurisdictional cooperation and providing mechanisms to encourage successful reorganisations and thereby protect both creditors and debtors.3
The common law doctrine of comity is central to Chapter 15 and is the driving force behind much of the relief, whether mandatory or discretionary, available for foreign debtors. Broadly speaking, comity means recognition within one nation of the judicial acts of another nation – not as a matter of law, but instead with regard to ‘practice, convenience and expediency’.4 Chapter 15 differs from Chapter 11 in a number of ways, including that a Chapter 15 proceeding can only exist as an ancillary proceeding – the debtor must have already commenced a debt adjustment proceeding somewhere outside of the United States.
The typical Chapter 15 debtor has a connection to the United States such that it requires aid from US courts in order to implement a successful restructuring.5 The exact nature of the relief will depend on the debtor’s circumstances – some will require that creditors are stayed from taking action against the debtor’s assets in the United States; others may require orders from a US court to give comfort to bond trustees regarding the retirement of old debt or the issuance of new securities; and still others may require more complicated substantive relief, such as permanent injunctive relief to give effect to releases embedded in a foreign restructuring plan.
There are typically two major inflection points over the course of a Chapter 15 proceeding; first, when the Chapter 15 proceeding is filed and the debtor’s foreign representative6 seeks recognition of the debtor’s foreign proceeding; and second, after a plan has been approved in the foreign jurisdiction, when the foreign representative will seek relief in aid of enforcement of the plan in the United States. By focusing on these two inflection points, this article aims to provide a non-exhaustive overview of what foreign debtors and creditors can expect in a Chapter 15 proceeding.
Commencing a Chapter 15 proceeding – recognition and provisional relief
A Chapter 15 proceeding is commenced by filing a petition with the bankruptcy court. Typically, a foreign representative files two motions with its Chapter 15 petition: (i) a motion for recognition of the debtor’s foreign proceeding as a foreign main proceeding; and (ii) a motion asking the court to provide the debtor with provisional relief while its motion for recognition of the foreign main proceeding remains pending.7
Recognition of foreign proceeding
With the exception of interim provisional relief, recognition of a foreign proceeding by a US court is a prerequisite to that court granting any further Chapter 15 relief. Most often, a debtor seeks recognition that its foreign proceeding is a ‘main proceeding’. Most significantly, upon recognition of a foreign main proceeding, a broad stay automatically takes effect with respect to the debtor’s property, assets or contracts within the territorial jurisdiction8 of the United States.9
In an order recognising a foreign proceeding as a main proceeding, in addition to finding that the Chapter 15 petition was properly filed and that the debtor’s appointed foreign representative has the appropriate authority to make such filings, the US bankruptcy court must make a finding that the jurisdiction in which the foreign proceeding has been commenced is the debtor’s ‘center of main interests’ (COMI).10 Whether or not the debtor’s COMI is in the jurisdiction where the foreign proceeding is pending is the most commonly litigated issue relating to recognition of foreign main proceedings.11
Chapter 15 creates a presumption that a debtor’s COMI is its registered office.12 The presumption is rebuttable, in which case the court will use a totality of the circumstances analysis,13 one that quickly becomes more difficult in more complex restructurings. In addition to difficult questions that can arise in the case of multiple debtors incorporated in various jurisdictions (ie, if debtors from multiple jurisdictions are subject to the same foreign proceeding, such proceeding could be a main proceeding for some debtors but not for others),14 recently, Chapter 15 courts have confronted difficult questions about under what circumstances a debtor’s COMI, which is evaluated as of the time of the Chapter 15 petition, may change in the period leading up to it. Courts have generally supported the notion that (absent bad faith) the institution of proceedings prior to the Chapter 15 filing may be sufficient to shift a debtor’s COMI to the situs of the proceedings.15
Given the lag time between a Chapter 15 filing and the entry of an order recognising the debtor’s foreign proceeding, most debtors will, contemporaneously with the petition and motion seeking recognition, file a motion for provisional relief seeking imposition of a stay of creditor actions while the motion for recognition is considered. Section 1519 of the Bankruptcy Code specifically contemplates such provisional relief.16
The Bankruptcy Code provides explicitly that ‘[t]he standards, procedures, and limitations applicable to an injunction shall apply to [provisional relief].’17 As such, the provisional relief analysis includes a balancing of the equities, including the likelihood of success of the recognition motion, whether other legal remedies aside from injunctive relief would be adequate, whether the balance of hardships favours the debtor or its creditors, and whether granting the injunction is in the public interest.
Absent unusual circumstances, provisional relief in the form of a stay is usually granted. On balance, courts typically find that prohibiting enforcement actions for several weeks will not cause any lasting harm and is a small price for an orderly process. However, even when not substantively objecting, creditors frequently file statements reserving their rights (ie, pleadings that do not ask for specific relief, but instead educate the court about arguments that may be raised in the future) and negotiate with the debtor specific provisions in the provisional relief or recognition orders to ensure that their rights are not prejudiced later on in the proceedings.18
Further relief, including enforcement of a plan confirmed in the debtor’s foreign proceeding
After a foreign proceeding has been recognised as a main proceeding, there is often a not unexpected lull in the Chapter 15 proceedings. With a stay in place, the typical Chapter 15 debtor does not immediately need additional relief from the US court, and focuses its efforts on plan approval in its foreign proceeding. Although a debtor may seek certain other relief from the Chapter 15 court prior to seeking to enforce its plan, and would need to respond to motions filed by creditors (eg, a motion to lift the stay), the relief most frequently sought is that in aid of enforcement and implementation of a plan once approved in the foreign proceeding.
Where a consensual solution has not been reached in the foreign proceeding, the post-confirmation stage of the Chapter 15 proceeding is often the most contentious. The main reason is that once a plan is approved in the foreign proceeding, unless appeals are available with a realistic chance of success, opposing a Chapter 15 motion in aid of enforcement of that plan is often a creditor’s last chance to stop the train from leaving the station.
Although Chapter 15 is clear about the relief automatically granted upon recognition of a foreign main proceeding, the statutory scheme for granting any subsequent relief (including relief in aid of implementation of a foreign plan) is more complex.
Schematically, Chapter 15 provides two major sources of post-confirmation discretionary relief, section 1521 and section 1507.
Section 1521 provides for certain enumerated relief, and also allows a court to grant ‘any additional relief that may be available to a trustee’, subject to certain exceptions.19 However, section 1521 is limited by section 1522, which provides that relief under section 1521 can only be granted ‘if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected’.
Section 1507 provides that ‘consistent with principles of comity’, a court may also grant ‘additional assistance’ and before doing so must also consider whether granting such additional assistance would reasonably assure the ‘just treatment of all holders of claims against or interests in the debtor’s property’ and a ‘distribution of proceeds of the debtor’s property substantially in accordance with [the Bankruptcy Code]’.20
Beyond these limitations, section 1506 contains a directive that ‘nothing in this chapter prevents the Court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.’ Known as the public policy exception, it provides courts with the ability to refuse to grant comity where doing so would be manifestly contrary to US public policy. To date, the public policy exception has been narrowly construed.
Commonly litigated issues
Given the still developing body of law regarding the relationship between additional relief and additional assistance,21 debtors typically seek relief under section 1521 or, in the alternative, under section 1507. Similarly, creditors opposing relief typically argue that the relief sought is manifestly contrary to public policy, or in the alternative, even if not contrary to US public policy, would not be available under US law.
The relief a debtor seeks post-recognition will be a function of what relief it requires in order to successfully implement its restructuring. Commonly litigated issues include procedural objections regarding the validity of the debtor’s foreign debt adjustment proceedings based on the level of due process available and substantive objections to specific aspects of the relief sought by debtors, and in particular, specific terms of a plan confirmed in the foreign proceeding.
Generally speaking, objecting to enforcement in the US of a plan confirmed in a foreign jurisdiction is an uphill battle for creditors. Because Chapter 15 proceedings are ancillary proceedings, courts are urged to conclude that where foreign courts have made reasoned determinations, it is not the place of the Chapter 15 court to second-guess them. Some US courts have agreed.22 Notwithstanding the difficulties, creditors frequently raise objections to (in particular) relief in aid of plan enforcement, including that a plan confirmed in a foreign jurisdiction has inappropriately broad third-party releases, that it does not comply with the absolute priority rule (ie, absent consent from or payment in full to unsecured creditors, equity should not recover), and that the plan discriminates unfairly among similarly situated creditors, just to name a few. Although the public policy exception has been construed narrowly,23 creditors have had some success in objecting to post-recognition relief and plan enforcement relief where courts have found the relief sought to be generally inconsistent with US law. One example is where debtors have sought enforcement in the United States of third-party non-debtor releases.24 In that instance, given how controversial such relief is under US law, courts are at minimum forced to confront whether the circumstances surrounding the releases are sufficiently similar to those where such releases would be allowed under US law in a Chapter 11 proceeding.25
From the perspective of a debtor, Chapter 15 is both powerful and limited – it allows the debtor to seek, inter alia, stay relief in the US, but it cannot serve as a substitute for plan confirmation in a debtor’s main proceeding, nor can a debtor assume that such plans will be enforced in the US if they differ significantly from relief that would be available under US law. Similarly, from the perspective of a creditor, Chapter 15 proceedings provide at least one forum where US norms of due process are protected, but the power of a Chapter 15 court to interfere with a foreign proceeding, particularly where the debtor seeks only limited relief in the US, is not broad. While Chapter 15 courts have become important forums in effectuating international restructurings, Chapter 15 proceedings remain ancillary to proceedings in foreign debtors’ home jurisdictions. Going forward, questions will focus on the limitations of the relief available to Chapter 15 debtors and the ability of creditors to effectively contest the granting of Chapter 15 relief, particularly where the creditors’ ability to exercise their rights in a debtor’s foreign main proceeding is not without question.
- Legislation based on the UNCITRAL Model Law has been adopted in more than 40 countries worldwide. See www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html (last visited 26 June 2017).
- Chapter 15 replaced former section 304 of the Bankruptcy Code, which was based on principles of comity and helped prompt the Model Law.
- See 11 U.S.C. section 1501(a).
- See, eg, Overseas Inns SA PA v United States, 911 F.2d 1146, 1148 (5th Cir. 1990) (quoting Somportex Ltd v Philadelphia Chewing Gum Corp, 453 F.2d 435, 440 (3rd Cir. 1971)).
- The example of a single debtor is for illustrative purposes only. In practice, Chapter 15 proceedings (like Chapter 11 proceedings) often include multiple debtors, and such proceedings are usually jointly administered. In complex restructurings, such as Abengoa’s, a corporate group may have some entities subject to Chapter 15 proceedings and others subject to Chapter 11 proceedings.
- In Chapter 15 proceedings, although relief is sought with respect to the debtor, it is the debtor’s foreign representative that files papers and appears before the Chapter 15 court.
- Given the applicable notice period under US law, it is usually several weeks between filing and the entry of an order granting recognition.
- In contrast with the Chapter 11 stay, which purports to be applicable worldwide, the Chapter 15 stay does not apply outside the territorial jurisdiction of the United States, except in rare instances where necessary to protect the debtor’s property inside the United States.
- See 11 U.S.C. section 1520(a).
- Although relief at the recognition or provisional relief stage is also subject to the public policy exception (discussed below), it is not discussed here because it is rarely invoked by Chapter 15 courts in the pre-recognition stage.
- Chapter 15 distinguishes between a ‘foreign main proceeding’ and a ‘foreign non-main proceeding.’ A proceeding is a foreign main proceeding ‘if it is pending in the country where the debtor has the center of its main interests’ and is a non-main proceeding if it is pending where the debtor only has an ‘establishment’. See 11 U.S.C. section 1517(b)(1)-(2). If a court finds a proceeding to be non-main rather than main, it retains jurisdiction over the debtor within the United States, but all relief is discretionary, including, most importantly, the stay within the United States. If a US court decides to exercise its discretion and grant relief, this would be a distinction without a difference.
- See 11 U.S.C. section 1516(c) (‘In the absence of evidence to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor’s main interests’).
- See, eg, In re Suntech Power Holdings Co, 520 B.R. 399, 416 (Bankr. S.D.N.Y. 2014) (‘In the absence of evidence to the contrary, the debtor’s registered office . . . is presumed to be the [COMI]. A debtor’s COMI is determined as of the time of the filing of the Chapter 15 petition, but, to offset a debtor’s ability to manipulate its COMI, a court may also look at the time period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition. The following non-exclusive group of factors guides the analysis, but consideration of these specific factors is neither required nor dispositive: Various factors, singly or combined could be relevant to [the COMI] determination: the location of the debtor’s headquarters, the location of those who actually manage the debtor (which, conceivably could be the headquarters of a holding company); the location of the debtor’s primary assets; the location of the majority of the debtor’s creditors or a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes. In addition, the Court may consider the location of the debtor’s nerve center, including where the debtor’s activities are directed and controlled, in determining a debtor’s COMI.’) (internal citation and quotation marks omitted).
- Questions such as these can be particularly difficult in the case of offshore finance vehicles in tax-friendly jurisdictions used to finance onshore operations of a debtor in its home jurisdiction.
- It is useful to highlight two recent cases: In In re Suntech Power Holdings Co, the Court considered the question of ‘whether the commencement of the provisional liquidation and the activities of the [joint provisional liquidators (or JPLs)] had the effect of transferring the COMI [of the debtor] from Wuxi, China to the Cayman Islands.’ Id. at 416-17. The court found that the substantial activity of the JPLs in anticipation of the filings in the Cayman Islands was sufficient to shift the COMI. Id. at 417. The court rejected allegations that the JPLs had manipulated the COMI, finding that the transfer of stock certificates, shareholder registries and statutory records, as well as opening a bank account, were ‘steps that the JPLs took consistent with the Appointment Order and their roles in the [Cayman] Proceeding and they would have taken these actions even if they had never intended to file a chapter 15 case.’ Id. at 420. Less than a year later, in the Chapter 15 proceedings of In re OAS SA, et al, the parties raised issues as to whether a liquidation order obtained by creditors in the British Virgin Islands less than 48 hours after the filing of the Chapter 15 proceeding (and before any decision was rendered whether OAS’ Brazilian proceedings were main proceedings) was sufficient to shift the COMI of a BVI-incorporated finance subsidiary from Brazil to the BVI; however, because a settlement was reached, the Court never ruled on these issues. See In re OAS SA, et al, No. 15-10937 (Bankr. S.D.N.Y. 2015) (SMB); In re OAS Finance Ltd, No. 15-11304 (Bankr. S.D.N.Y. 2015) (SMB).
- See 11 U.S.C. section 1519(a) (‘From the time of filing a petition for recognition until the Court rules on the petition . . . where relief is urgently needed to protect the assets of the debtor or the interests of creditors,’ provisional relief may be granted. Such relief may granted ‘only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.’ See 11 U.S.C. section 1522(a).
- See 11 U.S.C. section 1519(e).
- In In re Daebo Int’l Shipping Co Ltd, No. 15-10616 (Bankr. S.D.N.Y. 2015) (MEW), certain creditors objected to provisional relief that would vacate the pre-petition US attachment of one of Daebo’s vessels. Creditors argued irreparable injury if the vessel was allowed to leave port, because it would divest the local court of jurisdiction to continue hearing already commenced actions. Following negotiations with the debtor, (i) the provisional relief order reflected an agreement that the debtor would post a bond that would constitute the property required for the local court to retain jurisdiction, and in exchange the creditor would consent to the vessel leaving port, see Order Granting Provisional Relief and Approving Agreement with Certain Creditors, In re Daebo Int’l Shipping Co Ltd, No. 15-10616 (Bankr. S.D.N.Y. 2015), ECF No. 38; and (ii) the recognition order explicitly carved out certain local litigation from the stay, see Order Granting Recognition and Relief in Aid of a Foreign Main Proceeding Pursuant to 11 U.S.C. sectionsection 105(a), 1517, 1520 and 1521, In re Daebo Int’l Shipping Co Ltd, No. 15-10616 (Bankr. S.D.N.Y. 2015), ECF No. 53.
- 11 U.S.C. section 1521(a)(7) (emphasis added); 11 U.S.C. section 1522 (a). One major exception is that a Chapter 15 debtor is not allowed to pursue fraudulent transfer or preference litigation available under Chapter 11 (although the debtor may under certain circumstances pursue such litigation in the U.S. where the action arises under foreign law).
- See 11 U.S.C. section 1507(b). Section 1507 also requires that the Court consider whether such additional assistance will ‘protect . . . claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding’, ‘prevent [. . .] preferential or fraudulent dispositions of property of the debtor’ and ‘if appropriate, . . . [provide] an opportunity for a fresh start for the individual that such foreign proceeding concerns’.
- Although case law in this area is still developing on the relationship between ‘additional relief’ and ‘additional assistance,’ in 2012, the United States Court of Appeals for the Fifth Circuit laid out a framework for evaluating Chapter 15 relief beyond that granted automatically upon recognition of a foreign main proceeding. See In re Vitro SAB de CV, 701 F.3d 1031 (5th Cir. 2012). The guiding principles of the Vitro framework are: < br>• Step 1: Determine whether the relief sought is available under section 1521 (either because it is enumerated or is otherwise ‘appropriate relief’ (ie, where it could have been granted under former section 304, where precedent exists or whether such relief is generally available under US law, including in Chapter 11)), and if so, whether it is nonetheless prohibited by section 1522 (relief appropriate only if the interests of the creditors, the debtor and other interested parties are sufficiently protected). < br>• Step 2: If the Court finds that relief is not available under section 1521, it must then look to section 1507, which independently gives authority to provide ‘additional assistance,’ broader than that allowed under section 1521 but still subject to the limitations of section 1507. < br>• Step 3: Even where a court determines that relief may be available under sections 1521 or 1507, it may nonetheless refuse to grant such relief where it finds that it would be ‘manifestly contrary to the public policy of the United States’, an exception that is to be narrowly construed.
- See, eg, In re Cozumel Caribe SA de CV, 508 B.R. 330, 337 (Bankr. S.D.N.Y. 2014) (‘To inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor’s property by transforming a domestic court into a foreign appellate court where the creditors are always provided the proverbial ‘second bite at the apple’.’) (citation omitted).
- Only a few courts have ever relied on the public policy exception. See, eg, In re Toft, 453 B.R. 186, 198 (Bankr. S.D.N.Y. 2011) (granting unfettered access to emails in U.S. in aid of German insolvency proceeding was manifestly contrary to public policy as it ‘would seemingly result in criminal liability under the Wiretap Act and the Privacy Act for those who carried it out’); In re Irish Bank Resolution Corp, 559 B.R. 627 (Bankr. D. Del. 2016) (access to private email server denied, among other reasons, because granting such relief would have been in violation of the Stored Communications Act).
- See, eg, In re Vitro SAB de CV, 701 F.3d 1031 (denying relief in aid of a confirmed Mexican plan that included certain third-party non-debtor releases, reasoning that no special circumstances were present that warranted such extraordinary relief).
- See, eg, In re Sino-Forest Corp, 501 B.R. 655 (Bankr. S.D.N.Y. 2013) (granting relief in aid of implementation of a Canadian plan that provided for third-party non-debtor releases, reasoning in part that the certain of the released parties had made a substantial monetary contribution to the restructuring).