Chapter 15 of the U.S. Bankruptcy Code can be a very useful tool for foreign companies or individuals seeking bankruptcy relief in the U.S. Before obtaining any such relief though, a Chapter 15 debtor must first demonstrate that it is subject to a proceeding abroad that is entitled to "recognition" in the U.S. The recognition analysis often focuses on the locus of a foreign debtor's operations in order to determine if the proceeding pending abroad was commenced in the appropriate country. However, an issue that is equally important to the recognition analysis, but has received less attention until recently, is whether the proceeding is also a "foreign proceeding." The U.S. Bankruptcy Code defines this 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.1
Although this definition is broad, it has its limits, which are occasionally tested by the vast array of foreign out-of-court, judicial, quasi-judicial, and administrative processes by which creditors can recover against foreign debtors, and foreign debtors can restructure or liquidate. Some of these proceedings differ considerably from a typical U.S. bankruptcy proceeding, and parties seeking to challenge a foreign debtor's Chapter 15 petition often point to these differences as evidence that the proceeding should not be recognized under Chapter 15. This is precisely the strategy employed recently by various objectors in the hotly contested Chapter 15 case of Irish Bank Resolution Corp., the liquidation vehicle for Anglo Irish Bank Corp. Ltd. and Irish Nationwide Building Society. As this and other recent cases make clear, objections based on the "foreign proceeding" definition are an uphill climb, and even proceedings that are startlingly different from those in the U.S. often receive recognition.
Chapter 15 is based on the Model Law on Cross-Border Insolvency (the "Model Law"), which was adopted by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997. The Model Law was designed to encourage cooperation and coordination between jurisdictions in cross-border insolvency proceedings. Thus far, the legislatures of twenty countries and territories have enacted cross-border insolvency regimes based on the Model Law.2
Under Chapter 15, the representative of a foreign debtor that is subject to an insolvency or other proceeding abroad, can file a petition in a U.S. bankruptcy court seeking recognition of the debtor's foreign proceeding. If recognition is awarded, the Chapter 15 proceeding serves as an ancillary proceeding, the primary purpose of which is to assist the foreign proceeding with regard to U.S. matters affecting the debtor. Recognition may entitle the foreign debtor to a panoply of relief in the U.S., including a stay of all pending and future litigation in the U.S., the right to conduct its business in the U.S., and the right to commence litigation in the U.S.
A particularly useful feature of Chapter 15 is that a foreign debtor may obtain enforcement in the U.S. of an order issued in the debtor's foreign proceeding, even if that order provides relief that could not be granted to a U.S. debtor in a plenary case under the Bankruptcy Code.3However, before a foreign debtor is entitled to receive this and other relief under Chapter 15, the standards for recognition must be strictly applied to ensure that U.S. parties impacted by a foreign proceeding are treated fairly. Among these are the requirement that the proceeding satisfy the various prongs of the "foreign proceeding" definition. Courts often list these as follows:
- A proceeding that is;
- either judicial or administrative;
- collective in nature;
- in a foreign country;
- authorized or conducted under a law related to insolvency or the adjustment of debts;
- in which the assets and affairs of the debtor are subject to control or supervision by a foreign court; and
- for the purpose of reorganization or liquidation.4
The prongs that are most frequently the focus of challenges to a foreign debtor's request for recognition are that the proceeding be "subject to control or supervision by a foreign court" and that the proceeding be "collective in nature." As discussed below, case law detailing such challenges provides useful guidance on the scope of these requirements in practice.
The "foreign court" requirement
Betcorp Ltd. ("Betcorp") was an Australian company that provided online gambling services to customers in the U.S.5In 2006, Betcorp's business was severely impaired when the U.S. Congress passed the Unlawful Internet Gambling Enforcement Act, which prevented Betcorp from receiving fund transfers from U.S. customers. Shortly thereafter, in 2007, Betcorp's members commenced a voluntary winding-up of the company's operations by appointing liquidators to administer the company. Although the liquidators were regulated by the Australian Securities and Investments Commission (the "ASIC"), their appointment did not result in the commencement of a formal court proceeding in Australia.
In 2008, litigation was commenced against Betcorp in the U.S. by a company claiming that Betcorp's gambling operations infringed a patent it held on a data transmission system. Later that year, Betcorp's liquidators filed a Chapter 15 petition in the Bankruptcy Court for the District of Nevada, requesting recognition of Betcorp's Australian liquidation. The plaintiff in the patent litigation challenged the Chapter 15 petition, alleging, among other things, that the Australian liquidation did not qualify as a "foreign proceeding," primarily because the liquidation was not subject to the supervision or control of a "foreign court," as required under Chapter 15. In support of this argument, the challenger noted that (i) there was no lawsuit or legal proceeding pending in an Australian court that involved Betcorp's creditors, (ii) Betcorp was not subject to a bankruptcy proceeding or otherwise under administration in Australia, and (iii) there was no legal process by which a judge directly supervised the Betcorp liquidators' actions. Although these facts were acknowledged by the bankruptcy court, it nevertheless held that the Australian liquidation constituted a "foreign proceeding."
In reaching this decision, the bankruptcy court stated that "[i]nsolvency proceedings do not necessarily involve the intervention of a judicial authority,"6and that the hallmark of such proceedings is "a statutory framework that constrains a company's actions and regulates the final distribution of a company's assets."7Consistent with this approach, Chapter 15 defines the term "foreign court" as "a judicial or other authority competent to control or supervise a foreign proceeding."8The bankruptcy court acknowledged that in the U.S. the term "court" typically denotes a formal proceeding presided over by a judge. However, it noted that this interpretation was not necessarily shared abroad, and that bankruptcy courts are instructed, when interpreting Chapter 15, to "consider its international origin, and the need to promote an application of [Chapter 15] that is consistent with the application of similar statutes adopted by foreign jurisdictions."9After reviewing foreign insolvency regimes that deem government agencies such as the ASIC to be suitable bodies to supervise insolvency proceedings, the bankruptcy court determined that the ASIC constituted a "foreign court" for the purposes of Chapter 15. Accordingly, the Australian liquidation qualified as a "foreign proceeding" under Chapter 15.
A similar result was reached in In re Tradex Swiss AG, in which the Bankruptcy Court for the District of Massachusetts determined, with little discussion, that the "foreign court" definition in Chapter 15 was sufficiently broad to encompass a Swiss proceeding supervised by the Swiss Federal Banking Commission.10These cases demonstrate that the "foreign court" component of the "foreign proceeding" definition is quite broad and can encompass nearly any governmental or other authoritative body that supervises an insolvency proceeding.
Another case that involved a dispute over whether a foreign proceeding was subject to the "control or supervision" of a "foreign court" was In re Oversight & Central Com'n of Avanzit, S.A.11
Avanzit, S.A. ("Avanzit") was a telecommunications company that operated in twenty-five countries. On May 31, 2002, Avanzit filed a petition in a Spanish insolvency court seeking a suspension de pagos (a "suspension of payments"). The Spanish court subsequently issued a commencement order that stayed litigation and collection efforts against Avanzit, and appointed trustees to control Avanzit's activities jointly with management.
On January 7, 2004, the Spanish court approved a plan proposed by Avanzit to repay creditors. Upon approval, Avanzit's trustees were discharged and replaced with an oversight commission established under the plan to supervise Avanzit's compliance with the plan. The plan further provided that the Spanish court had jurisdiction to resolve any disagreements that may arise among Avanzit and its creditors regarding the plan.
On June 11, 2007, the oversight commission filed a motion in the Spanish court seeking to recover $25 million that had been deposited by Avanzit with BNPP Andes ("BNPP") prior to the commencement of the insolvency proceeding. The oversight commission also requested and ultimately received authority to file for Chapter 15 relief in the U.S. in order to aid Avanzit's investigation and recovery of the funds.
On November 29, 2007, the Avanzit oversight commission filed a Chapter 15 petition in the Bankruptcy Court for the Southern District of New York requesting recognition of the Spanish proceeding. BNPP subsequently objected to recognition on the grounds that once Avanzit's plan was approved, the Spanish court no longer "supervised and controlled" the company — the oversight commission and Avanzit's management did. According to BNPP, because there was no "foreign court" supervising the company, there was no "foreign proceeding" that could qualify for Chapter 15 relief.
The bankruptcy court disagreed. Although it acknowledged that the status of a proceeding can change such that it no longer qualifies as a "foreign proceeding," it held that this is not what occurred following the approval of Avanzit's plan. It reviewed the terms of the plan and stated that Avanzit was required to make payments to creditors for two more years, and if such payments could not be made, the company would face liquidation in the Spanish court. It also noted that the plan explicitly provided that the Spanish court had jurisdiction to resolve disputes under the plan. For these reasons, the Spanish proceeding had not yet formerly closed. Accordingly, the bankruptcy court found that "[a]lthough the Spanish Insolvency Court's control and supervision was reduced once the [plan] was approved, it did not surrender all supervision and control."12The bankruptcy court further found that Avanzit's status was similar to a Chapter 11 debtor in the U.S. following confirmation of its plan, and that U.S. law holds that although jurisdiction "shrinks" in such circumstances, it does not end. The bankruptcy court noted that the post-confirmation period can lead to substantial litigation and it would frustrate the goals of Chapter 15 if assistance to a foreign tribunal was "cut off . . . at a time when cooperation, certainty, fairness, asset values and financial relief were most needed . . ."13
Avanzit thus establishes that the jurisdiction of a foreign court or administrative body likely persists until distributions have been made and creditor disputes have been resolved to the point that the case can be closed. As in Betcorp and Tradex, the Avanzit decision was based on the plain language of Chapter 15 and common sense. The "foreign court" prong was intended to be broad and has been interpreted that way. Accordingly, challengers have not had much success opposing recognition on this ground. Although recognition challengers continue to raise arguments based on the "foreign court" prong, the principal battleground recently has shifted to the requirement that a proceeding be "collective in nature."
The "collective" requirement
The requirement that a proceeding be "collective in nature" is understood in the U.S. to mean that the foreign proceeding involves substantially all of the debtors' creditors and that similarly situated claimants will be treated equally.14Without a centralized forum for addressing creditor claims in a fair and orderly manner, creditors would be incentivized to "race to the court house" to collect from a distressed debtor, as was the case prior to the passage of bankruptcy laws in the U.S. Preventing such disorganized grappling for debtor assets provides the debtor time and space to restructure or liquidate in an orderly fashion. The "collective" requirement thus ensures that U.S. parties are not subject to a foreign proceeding that is prejudicial and fundamentally unfair. As the cases below show, only in narrow circumstances is this requirement not satisfied.
A. Gold & Honey
In re Gold & Honey, Ltd. represents one of the few instances in which the "foreign proceeding" definition was not satisfied.15This case involved Gold & Honey, Ltd. ("GH Ltd"), Gold & Honey L.P. ("GH LP"), and certain other affiliated debtors that were jewelry designers, manufacturers, and marketers operating out of Israel and the U.S. GH Ltd's operations were financed by a credit line with First International Bank of Israel ("FIBI"), which was ultimately guaranteed by GH LP and secured by substantially all of the debtors' accounts and equipment. In late July 2008, FIBI seized these assets and commenced a receivership proceeding against the debtors in Israel. Before FIBI could obtain relief in Israel, the debtors filed for Chapter 11 protection in the U.S. Despite the fact that the automatic stay in the U.S. prohibited any enforcement action against the debtors, FIBI continued its application for receivership in Israel. The application was successful and receivers were appointed by the Israeli court to oversee the debtors' businesses. Then, following months of legal wrangling between the debtors and the receivers over the effect of the U.S. stay on the receivership proceeding, the receivers filed a Chapter 15 petition in the Bankruptcy Court for the Eastern District of New York seeking recognition of the Israeli receivership proceeding.
In considering the Chapter 15 petition, the bankruptcy court was particularly troubled by the fact that the petitioners and the Israeli court blatantly disregarded the effect of the earlier Chapter 11 stay, an act in direct contravention of U.S. public policy. The bankruptcy court was also troubled by the fact that the receivership proceeding in Israel was not collective in nature. The bankruptcy court noted that receiverships are typically instigated at the request, and for the benefit of, a single secured creditor, and are generally regarded as more prejudicial to creditors as a whole than federal bankruptcy proceedings. With regard to the Israeli receivership in particular, the bankruptcy court noted that it is designed to "allow FIBI to collect its debts, and is not a scheme of arrangement or a winding up proceeding, both of which are instituted by a debtor for the purposes of paying off all creditors with court supervision to ensure evenhandedness."16The bankruptcy court also noted that the Israeli Companies Ordinance, which governs the Israeli receivership proceeding, is a separate statute from the Israeli Bankruptcy Ordinance, which provides for collective creditor proceedings similar to cases under the U.S. Bankruptcy Code. Accordingly, the bankruptcy court found that the receivership did not satisfy Chapter 15's requirements that a proceeding be collective in nature, and thus did not qualify as a "foreign proceeding."
B. British American Insurance Company
The next case concerning the "collective" requirement involved British American Insurance Company Ltd. ("BAICO"), an insurance company that was chartered in the Bahamas and operated throughout the Caribbean.17In 2009, it commenced an insolvency proceeding in the Bahamas and a judicial manager was appointed to oversee its affairs and provide a report to the Bahamas court recommending whether BAICO should be wound-up or if other alternatives should be pursued. Around this time, a proceeding was also commenced by BAICO in Saint Vincent and the Grenadines ("SVG"), which led to the appointment of another judicial manager who was also required to produce a similar report with respect to the company's operations in SVG.
On October 9, 2009, the Bahamian and SVG judicial managers filed Chapter 15 petitions in the Bankruptcy Court for the Southern District of Florida seeking recognition of the Bahamas and SVG proceedings. A creditor of BAICO opposed recognition of both proceedings on the grounds that they were not "collective" because they were commenced only to protect BAICO's insurance policyholders, a single class of creditors. In support of this argument, the creditor pointed to the order appointing the Bahamian judicial manager, which stated that the judicial manager shall recommend courses of action for the insolvency proceeding that "are the most advantageous to the general interests of the policyholders of BAICO."18The creditor also pointed to similar statements made by one of the judicial managers in a deposition.
The U.S. bankruptcy court held that the creditor's evidence was insufficient to demonstrate that the Bahamian proceeding was not collective. It stated that "[i]n determining whether a particular foreign action is collective as contemplated under section 101(23), it is appropriate to consider both the law governing the foreign action and the parameters of the particular proceeding . . ."19It noted that the Bahamas Insurance Act, the law governing the Bahamas proceeding, directs the Bahamas court to consider the effect of a debtor's financial condition on both policyholders and general creditors. The bankruptcy court then pointed to an order in the Bahamas proceeding in which the rights of general creditors were considered. It also was persuaded by the testimony of an expert on Bahamian insolvency law, who confirmed that judicial managers must safeguard the interests of both policyholders and general creditors. Based on this evidence, the bankruptcy court held that the Bahamas proceeding was collective in nature. A similar analysis was conducted with respect to the SVG proceeding, resulting in the same outcome. In the end, the U.S. bankruptcy court was not troubled by the statements suggesting certain policyholders were being favored because the weight of the evidence indicated that the proceeding was being conducted fairly in practice. This standard would feature prominently in the Ashapura case detailed below.
C. Ashapura Minechem
Ashapura Minechem Ltd. ("Ashapura") is a mining and industrial business headquartered in India.20Following the entry of two arbitration awards against it in May 2011 that exceeded $100 million, Ashapura commenced a proceeding before India's Board for Industrial and Financial Reconstruction to rehabilitate under the Sick Industrial Companies Act ("SICA"). Subsequently, in October 2011, Ashapura filed for Chapter 15 relief in the Bankruptcy Court for the Southern District of New York, seeking recognition of the Indian proceeding. The arbitration claimants objected to Ashapura's request for recognition on the basis that, among other things, the SICA proceeding was not "collective in nature." They argued that the text of SICA does not contemplate the involvement of unsecured creditors in such proceedings. They also produced evidence indicating that SICA is viewed by the Indian legislature as fundamentally flawed, is set to be replaced by a revised statute, and has been heavily criticized by Indian legal experts.
In response, Ashapura provided testimony from an Indian attorney with experience in SICA proceedings regarding the involvement of unsecured creditors in such cases. He acknowledged that SICA does not contain a formal mechanism for participation by unsecured creditors, but that in practice, unsecured creditors have a voice in the proceedings, can receive distributions, and have the ability to appeal adverse determinations. In considering whether this level of involvement was sufficient to render the Indian proceeding "collective in nature," the bankruptcy court reviewed UNCITRAL's guidance on the collective requirement, which states that:
The notion of a 'collective' insolvency proceeding is based on the ability of a single insolvency representative to control the realization of assets for the purposes of pro rata distribution among all creditors . . ., as opposed to a proceeding designed to assist a particular creditor to obtain payment or a process designed for some purpose other than to address the insolvency of the debtor.21
Applying this standard, the bankruptcy court found that although the level of creditor involvement in Ashapura's proceeding is lower than the involvement typical in a Chapter 11 case in the U.S., the proceeding did involve all creditors and thus satisfied the requirement that the proceeding be collective in nature. The bankruptcy court recognized that SICA may be flawed, but nevertheless found that the claimants had not provided sufficient evidence to rebut the testimony offered by Ashapura.
The claimants subsequently appealed the bankruptcy court's ruling to the District Court for the Southern District of New York. The district court affirmed the ruling, agreeing that the SICA proceeding "considered the interests of all creditors in practice."22In support of this conclusion, the district court referenced the language in British Am. Ins., quoted above, which stresses that courts should examine the "parameters of the particular proceeding."23According to the district court, because unsecured creditors were actually involved in Ashapura's particular SICA proceeding, it did not matter that SICA did not explicitly set forth such involvement. Accordingly, the district court upheld the bankruptcy court's ruling that the SICA proceeding was a "foreign proceeding."
D. ABC Learning
ABC Learning Centres Ltd., the next case to consider the "collective" requirement, addressed a situation in which a receiver had an outsized role in an Australian insolvency proceeding. Although the recognition challenger attempted to frame the case as a repeat of Gold & Honey, the outcome was decidedly different.24
ABC Learning Centres Ltd. ("ABC") was an Australian company that provided childcare and educational services in Australia, the U.S. and elsewhere through certain subsidiaries. In 2008, ABC's directors commenced a voluntary administration in Australia and appointed administrators to determine whether the company should be restructured or liquidated. The voluntary administration breached certain of ABC's secured loan agreements, triggering the secured creditors' rights to appoint a receiver to realize ABC's assets for their benefit, which they exercised.
In 2010, ABC's directors voted to commence a liquidation, which resulted in the administrators becoming liquidators of the company for the benefit of all creditors. The receiver continued its role on behalf of the secured creditors. Because ABC's secured debts exceeded the value of all of ABC's assets, the estate was entirely encumbered by the secured creditors' liens. Accordingly, the receiver effectively was responsible for realizing all of the company's assets, and the liquidators were largely relegated to monitoring the progress of the receiver's efforts.
Later in 2010, the liquidators filed a Chapter 15 petition in the Bankruptcy Court for the District of Delaware seeking recognition of the Australian liquidation. Recognition was challenged by RCS Capital Development LLC ("RCS"), a company that had earlier received a judgment against an ABC subsidiary in the U.S. The focus of the challenge was that because ABC's assets were entirely encumbered, the estate was effectively being resolved by the receiver solely for the benefit of secured creditors, in violation of Chapter 15's collective proceeding requirement. According to RCS, the receivership "dominated" the liquidation, leaving the liquidators (the only fiduciaries representing all creditor interests) with little to do.
The bankruptcy court was not persuaded by RCS's argument and granted recognition to the Australian liquidation. This decision was appealed to the District Court for the District of Delaware, which affirmed the bankruptcy court's decision. The district court's decision was then appealed to the U.S. Court of Appeals for the Third Circuit, which also affirmed the decision, concluding that "[i]t is undisputed that the Australian liquidation proceeding is a collective proceeding."25In reaching this conclusion, the Third Circuit emphasized that the liquidators were required to distribute any available assets on a pro-rata basis to creditors of the same priority, and that secured creditors had the right to appoint a receiver to marshal assets covered by their liens. The fact that there likely would be nothing remaining for unsecured creditors in ABC's case, did not change the fact that the liquidation was a proceeding in which all similarly situated creditors were being treated equally. The Third Circuit noted that if recognition was denied, RCS could then "skip ahead of the priorities of the secured creditors," which would eviscerate the orderly nature of the liquidation proceeding and the strict priority of debts.26The Third Circuit stated that this was precisely the "race to the courthouse" that bankruptcy laws seek to avoid.
ABC Learning and other cases summarized above indicate that the "collective" requirement is easily satisfied. In Gold & Honey, the only reported case in which the "collective" requirement was not met, the proceeding in question was conducted for the sole benefit of secured creditors and pursuant to a statute that focused entirely on secured creditor rights. The result is not surprising as the proceeding in question was not an insolvency proceeding at all. This is in contrast to the remaining cases, in which the relevant proceedings were found to be collective because they were, at bottom, proceedings concerning all of the debtors' creditors, though the protections afforded to such creditors varied considerably. Ashapura is perhaps the most surprising of these cases because the statute governing the foreign proceeding did not provide explicit rights for unsecured creditors. Nevertheless, the bankruptcy court and the district court determined that the Indian proceeding was collective solely because creditors had a say in practice. One wonders though, how effective such creditor participation can be if creditor rights are not codified. This decision highlights, more than any other, U.S. courts' reluctance to second-guess the insolvency regimes of foreign countries. In this respect, U.S. courts have taken to heart their instruction to interpret Chapter 15 based on "its international origin." This is reflected in the fact that although cases in which recognition is denied grab headlines, they are very few in number. In fact, an analysis of Chapter 15 filings since 2005, the year the Chapter went into effect, indicates that only approximately 3% of requests for recognition have been denied on any basis.
It is against this backdrop that the latest high profile recognition battle was waged in In re Irish Bank Resolution Corp. Ltd.27
E. Irish Bank Resolution Corp.
The Irish Bank Resolution Corp. Ltd. ("IBRC") is a state-owned banking entity that was created in 2011 under the Irish Credit Institutions (Stabilisation) Act 2010 to merge with and wind-down two large Irish banks that had encountered financial difficulties — Anglo Irish Bank Corp. Ltd. and Irish Nationwide Building Society. On February 7, 2013, the Irish finance minister issued a special order appointing joint special liquidators for IBRC and authorizing them to liquidate IBRC. On August 26, 2013, the joint special liquidators filed for Chapter 15 relief in the U.S., seeking recognition of the Irish liquidation proceeding. The filings accompanying IBRC's Chapter 15 petition noted that the Irish proceeding is being conducted administratively (rather than in a formal court) and is "collective in nature." In particular, IBRC noted that the liquidators are required to: (i) provide notice to creditors, (ii) conduct a transparent process for realizing assets, and (iii) pay creditors according to a priority scheme. IBRC's creditors can also file and prove claims against IBRC in the proceeding and commence litigation against IBRC with the consent of the Irish High Court.28
Numerous creditors objected to IBRC's recognition request on the basis that, among other things, the Irish proceeding does not satisfy the "foreign proceeding" definition. For example, one creditor argued, similar to the objections in Betcorp and Tradex, that because the Irish process is not subject to the supervision of a court, there is "no 'authority' controlling or supervising the Irish process."29That creditor also argued that the Irish process is not collective and that the governing statute "pays lip service to distributing assets to creditors in accordance with established priorities, but the process is being run for the sole benefit of the Irish government."30Another creditor alleged that because the Irish government is the owner of IBRC and left little room in the governing statues for judicial oversight of the process, such "combination of control, ownership and non-review cannot qualify as a 'foreign proceeding.' ''31One creditor even argued that because such governing statutes are so new, it is "impossible for creditors to know in advance - and in some cases, even after the fact—how the Irish Process will play out."32This argument is based on language in Betcorp stating that the essence of a proceeding is "acts and formalities set down in law so that courts, merchants and creditors can know them in advance, and apply them evenly in practice."33
Despite these arguments, the Bankruptcy Court for the District of Delaware granted recognition to IBRC's foreign proceeding.34In keeping with the line of cases discussed above, the bankruptcy court determined that the Irish liquidation satisfied the "foreign court" and "collective" prongs of the foreign proceeding definition.35Notably, John Flynn, one of the parties that opposed IBRC's request for recognition, subsequently appealed the bankruptcy court's order to the District Court for the District of Delaware, and on February 18, 2014, filed a request for direct certification of the appeal to the United States Court of Appeals for the Third Circuit.36The appeal remains pending.
The IBRC case and the line of cases preceding it, strongly suggest that in order to successfully challenge a foreign debtor's request for recognition on the basis that it does not comply with the "foreign proceeding" definition, a challenger must demonstrate one of two things: (i) that the foreign proceeding is being conducted for the sole benefit of a single creditor and is thus not an insolvency proceeding at all, or (ii) that compelling evidence suggests that some or all of the creditors in the foreign proceeding have not had a fair opportunity to participate in the proceeding. Merely pointing out that a foreign insolvency statute provides little to no protections for certain creditors, is not enough. Courts have repeatedly overlooked such shortfalls — instead relying on the actual, fair treatment of creditors. Although this avenue for attacking a foreign debtor's request for recognition has been blunted overtime, other tools (including challenges to a debtor's center of main interests and compliance with the public policy of the U.S.) can make the difference in the appropriate case.37Accordingly, foreign debtors must remain vigilant and ensure that their foreign proceedings are commenced in the appropriate jurisdiction, that creditors are treated fairly in that proceeding, and that any relief requested in the U.S. is not manifestly contrary to U.S. public policy.
Originally published by Thomson Reuters, Norton Journal of Bankruptcy Law and Practice.
1. 11 U.S.C.A. § 101(23).
2. Australia (2008), British Virgin Islands (2003), Canada (2005), Chile (2014), Columbia (2006), Eritrea (1998), Greece (2010), Japan (2000), Mauritius (2009), Mexico (2000), Montenegro (2002), New Zealand (2006), Poland (2003), Republic of Korea (2006), Romania (2002), Serbia (2004), Slovenia (2007), South Africa (2000), Uganda (2011), Great Britain (2006), United States (2005). See UNCITRAL, http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.
3. See Metcalfe & Mansfield Alternative Investments, Case No. 09-16709 (Bankr. S.D.N.Y. Jan. 5, 2010).
4. See In re ABC Learning Centres Ltd., Case No. 12-2808, at 13 (3d Cir. Aug. 27, 2013).
5. See In re Betcorp Ltd., 400 B.R. 266, 281, 51 Bankr. Ct. Dec. (CRR) 99 (Bankr. D. Nev. 2009).
6. In re Betcorp Ltd., 400 B.R. 266, 277, 51 Bankr. Ct. Dec. (CRR) 99 (Bankr. D. Nev. 2009).
7. In re Betcorp Ltd., 400 B.R. 266, 278, 51 Bankr. Ct. Dec. (CRR) 99 (Bankr. D. Nev. 2009).
8. 11 U.S.C.A. § 1502(3) (emphasis supplied).
9. Betcorp Ltd., 400 B.R. at 276 and 283 (quoting 11 U.S.C.A. § 1508).
10. See In re Tradex Swiss AG, 384 B.R. 34, 49 Bankr. Ct. Dec. (CRR) 190 (Bankr. D. Mass. 2008).
11. See In re Oversight and Control Com'n of Avanzit, S.A., 385 B.R. 525, 49 Bankr. Ct. Dec. (CRR) 260, 59 Collier Bankr. Cas. 2d (MB) 879 (Bankr. S.D. N.Y. 2008).
12. Avanzit, 385 B.R. at 534.
13. Avanzit, 385 B.R. at 535.
14. See Betcorp, 400 B.R. at 281 (a collective proceeding "considers the rights and obligations of all creditors."); In re Schimmelpenninck, 183 F.3d 347, 351, 34 Bankr. Ct. Dec. (CRR) 932, 42 Collier Bankr. Cas. 2d (MB) 904 (5th Cir. 1999) ("Ultimately, the interests of all creditors, foreign and domestic, are to be put on a level playing field, with like-situated claimants being treated equally.") (quoting H.R. Rep. No. 95-595, 1st Sess., at 340 (1997).
15. See In re Gold & Honey, Ltd., 410 B.R. 357, 52 Bankr. Ct. Dec. (CRR) 6 (Bankr. E.D. N.Y. 2009).
16. Gold & Honey, 410 B.R. at 370.
17. In re British American Ins. Co. Ltd., 425 B.R. 884, 52 Bankr. Ct. Dec. (CRR) 286 (Bankr. S.D. Fla. 2010).
18. In re British American Ins. Co. Ltd., 425 B.R. 884, 901, 52 Bankr. Ct. Dec. (CRR) 286 (Bankr. S.D. Fla. 2010).
19. In re British American Ins. Co. Ltd., 425 B.R. 884, 902, 52 Bankr. Ct. Dec. (CRR) 286 (Bankr. S.D. Fla. 2010).
20. Errata Order re Bench Decision Granting Petition for Recognition of Foreign Proceeding, In re Ashapura Minechem Ltd., Case No. 11-14668 (Bankr. S.D.N.Y. Nov. 28, 2011).
21. Errata Order re Bench Decision Granting Petition for Recognition of Foreign Proceeding, In re Ashapura Minechem Ltd., Case No. 11-14668 (Bankr. S.D.N.Y. Nov. 28, 2011) at *8 (quoting UNCITRAL, the UNCITRAL Model Law on Cross-Border Insolvency: the judicial perspective [pre-release] at 19 (July 2011)).
22. Opinion and Order at 20, Armada (Singapore) Pte Ltd. v. Shah (In re Ashapura Minechem Ltd.), No. 12 Civ. 257 (SAS) (S.D.N.Y. June 28, 2012) (emphasis in original).
23. Opinion and Order at 20, Armada (Singapore) Pte Ltd. v. Shah (In re Ashapura Minechem Ltd.), No. 12 Civ. 257 (SAS) (S.D.N.Y. June 28, 2012) (quoting British Am. Ins. Co., 425 B.R. at 902).
24. In re ABC Learning Centres Ltd., Case No. 12-2808 (3d Cir. Aug. 27, 2013).
25. In re ABC Learning Centres Ltd., Case No. 12-2808 at 18.
26. In re ABC Learning Centres Ltd., Case No. 12-2808 at 18.
27. In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. 2013).
28. Memorandum of Law in Support of IBRC's Verified Petition Under Chapter 15 for Recognition of a Foreign Main Proceeding, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Aug. 26, 2013), ECF No. 7.
29. Preliminary Objection to Verified Petition Under Chapter 15 for Recognition of a Foreign Main Proceeding at ¶ 23, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Sept. 16, 2013), ECF No. 41.
30. Preliminary Objection to Verified Petition Under Chapter 15 for Recognition of a Foreign Main Proceeding at ¶ 27; see also Opposition to the Verified Petition under Chapter 15 for the Recognition of a Foreign Proceeding at ¶ 65, In re Irish Bank Resolution Corp. Ltd.,Case No. 13-12159 (Bankr. D. Del. Sept. 13, 2013), ECF No. 34 ("the process is completely managed by a single creditor, the Finance Minister, who specifically directs the Special Liquidators . . .").
31. Objection by Castleway Properties, LLC and Walnut-Rittenhouse Associates, L.P. to the Verified Petition for Recognition under Chapter 15 and Proposed Order Submitted by Irish Bank Resolution Corporation Limited at ¶ 25, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Sept. 18, 2013), ECF No. 51.
32. Preliminary Objection to Verified Petition Under Chapter 15 for Recognition of a Foreign Main Proceeding at ¶ 25, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Sept. 16, 2013), ECF No. 41.
33. Preliminary Objection to Verified Petition Under Chapter 15 for Recognition of a Foreign Main Proceeding at ¶ 25 (quoting In re Betcorp Ltd., 400 B.R. at 278).
34. Order Granting Recognition of Foreign Main Proceeding and Related Relief, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Dec. 18, 2013), ECF No. 187.
35. Order Granting Recognition of Foreign Main Proceeding and Related Relief, In re Irish Bank Resolution Corp. Ltd., Case No. 13-12159 (Bankr. D. Del. Dec. 18, 2013), ECF No. 187 at 3.
36. See In re Irish Bank Resolution Corp. Ltd., C.A. No. 14-108 (LPS) (D. Del. Feb. 18, 2014).
37. See, e.g., In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 48 Bankr. Ct. Dec. (CRR) 216 (Bankr. S.D. N.Y. 2007), aff'd, 389 B.R. 325, Bankr. L. Rep. (CCH) P 81258 (S.D. N.Y. 2008) (denying recognition to a Cayman Islands proceeding because the debtor did not have its center of main interests in the Cayman Islands or an establishment in the Cayman Islands); In re Toft, 453 B.R. 186, 55 Bankr. Ct. Dec. (CRR) 61, 66 Collier Bankr. Cas. 2d (MB) 323 (Bankr. S.D. N.Y. 2011) (holding that enforcement in the U.S. of a German order authorizing the wiretapping of an individual debtor would "directly contravene U.S. laws and public policies").
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