Like debtors, bankruptcy trustees, official committees, examiners, and estate-compensated professionals, foreign representatives in chapter 15 cases have statutory reporting obligations to the bankruptcy court and other stakeholders as required by the plain language of the Bankruptcy Code. Such duties include the obligation to keep the U.S. bankruptcy court promptly informed of changes in either the status of the debtor's foreign bankruptcy case or the status of the foreign representative's appointment in that case. Furthermore, chapter 15 provides a U.S. bankruptcy court with flexibility to communicate directly with and request assistance from a foreign court or a foreign representative in appropriate circumstances.
The U.S. Bankruptcy Court for the Northern District of Illinois recently examined a foreign representative's communication obligations and the U.S. court's communication capabilities in In re Ace Track Co., Ltd., 647 B.R. 919 (Bankr. N.D. Ill. 2023). Faced with a foreign representative who failed for nearly five years to notify the bankruptcy court (or his own counsel) of changed circumstances, including the closure of the debtor's Korean rehabilitation case, the court, after directly communicating with the foreign court, ordered that the debtor's chapter 15 case be closed because it had been fully administered, permitted the foreign representative's counsel to withdraw, and banned the foreign representative from acting in such a capacity in other chapter 15 cases in the U.S. Bankruptcy Court for the Northern District of Illinois without express permission.
Procedures, Recognition, and Relief Under Chapter 15
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c).
An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. See In re British Am. Ins. Co., 425 B.R. 884, 915 (Bankr. S.D. Fla. 2010).
After filing a petition for chapter 15 recognition, a foreign representative is obligated to notify the bankruptcy court promptly of, among other things, "any substantial change in the status of such foreign proceeding or the status of the foreign representative's appointment." 11 U.S.C. § 1518.
Section 1517(d) provides that the court may close a chapter 15 case in the manner specified in section 350 of the Bankruptcy Code. In short, section 350 requires a case to be closed "[a]fter an estate is fully administered." Rule 5009(c) of the Federal Rules of Bankruptcy Procedure sets forth the requirements for closing a chapter 15 case after the foreign representative has filed a final report detailing the results of his or her activities and stating that the case has been fully administered.
Following chapter 15 recognition of a foreign proceeding, the court may dismiss or suspend all proceedings in the chapter 15 case if the interests of creditors and the debtor would be best served by such relief or "the purposes of chapter 15 ... would be best served by such dismissal or suspension." 11 U.S.C. § 305(a); see also 11 U.S.C. § 1529(4) (authorizing a bankruptcy court, in attempting to coordinate a chapter 15 case or a foreign proceeding with a case filed under another chapter of the Bankruptcy Code, to "grant any of the relief authorized under section 305."
To promote comity and cooperation among courts presiding over cross-border bankruptcies, chapter 15 of the Bankruptcy Code provides that "the court shall cooperate to the maximum extent possible with a foreign court or a foreign representative," 11 U.S.C. § 1525(a), and "[t]he court is entitled to communicate directly with, or to request information or assistance directly from, a foreign court or a foreign representative." 11 U.S.C. § 1525(b).
Section 1527 is titled "Forms of cooperation" and specifies means for such cooperation, including, but not limited to: (i) the appointment of a person or entity to act at the court's direction; (ii) the communication of information by any appropriate means; (iii) coordination of the administration of the debtor's assets and the supervision of its affairs; (iv) implementation of agreements concerning the coordination of proceedings; and (v) coordination of concurrent proceedings involving the same debtor.
In 2014, South Korea-based heavy machinery manufacturer Ace Track Co., Ltd. (the "debtor") commenced a rehabilitation proceeding (the "Korean proceeding") in South Korea under the Rehabilitation and Bankruptcy Act. The genesis for the Korean proceeding was litigation filed against the debtor in the United States in connection with a patent dispute. In September 2014, a South Korean bankruptcy court comprising three judges (the "Korean Judges") granted the debtor's petition and appointed Sooan Cho ("Cho") to act as the debtor's receiver and foreign representative.
In April 2015, Cho filed a petition in the U.S. Bankruptcy Court for the Northern District of Illinois seeking recognition of the Korean proceeding under chapter 15 for the purpose of staying the U.S. litigation against the debtor. The U.S. bankruptcy court entered an order in June 2015 recognizing the Korean proceeding under chapter 15 as a foreign main proceeding. The chapter 15 case then lay dormant for more than five years.
In November 2022, Cho's counsel filed a motion to withdraw from the representation, stating that they had not had any contact with Cho since late 2016 or early 2017, and that they were unaware of any way to contact him.
Before ruling on the withdrawal motion, U.S. Bankruptcy Judge Timothy A. Barnes issued an order (the "Order to Show Cause") directing any interested party to show cause why: (i) the chapter 15 case should not be closed; (ii) Cho's counsel should not be relieved from the representation; and (iii) Cho should not be barred from acting as a foreign representative in any matter before the U.S. Bankruptcy Court for the Northern District of Illinois without court authorization. Prior to issuing the Order to Show Cause, the court, as permitted under section 1525(b) of the Bankruptcy Code, unsuccessfully attempted to contact Cho. In addition, again relying on 1525(b), Judge Barnes attempted to communicate with the Korean Judges, without success.
However, through personal connections in South Korea, Judge Barnes was able to communicate with Judge Jang Min-seok of the South Korean Bankruptcy Court, and Judge Jang provided the following update on the status of the Korean proceeding: (i) the South Korean Bankruptcy Court had approved the debtor's rehabilitation plan in June 2015; (ii) Cho's duties as the debtor's receiver terminated in December 2016; (iii) the Korean proceeding was closed in February 2018; and (iv) none of the Korean Judges was still with the South Korean Bankruptcy Court.
Judge Barnes directed that the Order to Show Cause be served on all parties in the chapter 15 case, including Cho at his last known address.
The Bankruptcy Court's Ruling
After receiving no response to the Order to Show Cause, the bankruptcy court ordered that the debtor's chapter 15 case be closed, permitted Cho's counsel to withdraw, and barred Cho from appearing as a foreign representative in other cases in the U.S. Bankruptcy Court for the Northern District of Illinois without express written permission.
Cho did not appear at the hearing or communicate with either the court or his own lawyers.
At the outset of his ruling, Judge Barnes wrote that Cho's failure to communicate with his own lawyers, "of course, is unacceptable." Ace Track, 647 B.R. at 919.
He further explained that Cho failed to satisfy his obligation under section 1518 to inform the U.S. bankruptcy court promptly of any change in circumstances regarding the Korean proceeding, and put both the court and his own lawyers in an awkward position:
As the petitioner in this matter, the Foreign Representative bears a responsibility both to his Counsel and to this court. He may not commence an action, obtain what he needs, and leave without caring about his duties in the United States. The Foreign Representative left this court without an active petitioner and Counsel without client direction. Though knowing that the case should be closed, Counsel may not, in the absence of that direction, move to close the case without stepping into an ethical quagmire.
Nearly all bankruptcy practitioners are familiar with the statutory obligations and responsibilities of debtors, bankruptcy trustees, examiners, official committees, and estate-compensated professionals in cases under other chapters of the Bankruptcy Code. Due to the comparative infrequency of chapter 15 cases, the obligations of debtors and foreign representatives in chapter 15 cases is less well understood. Lack of precedent notwithstanding, however, the plain text of the Bankruptcy Code imposes certain reporting requirements on a foreign representative: Section 1518 imposes an affirmative duty on the foreign representative to keep the bankruptcy court informed (i.e., "the foreign representative shall file with the court promptly a notice of change of status") of any substantial change in the foreign proceeding or the status of the foreign representative's appointment.
In keeping with chapter 15's purpose as a vehicle to coordinate cross-border bankruptcy cases and to promote cooperation between U.S. and foreign courts, one of the indispensable features of chapter 15 is communication among courts and court functionaries, such as liquidators, trustees, and other insolvency practitioners. As demonstrated by Ace Track, the ability of a U.S. bankruptcy court, on its own initiative, to initiate communications with a foreign court under section 1525(b)—and, more specifically, investigate whether significant changes in circumstances have occurred—promotes the objectives of chapter 15, including the "fair and efficient administration of cross-border insolvencies."
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