An Introduction to Chapter 15 of the Bankruptcy Code
by David Bennett, Katie Battaia Clark and Cassandra Ann Sepanik
Chapter 15 of the Bankruptcy Code governs U.S. bankruptcy cases which are “ancillary” to foreign insolvency proceedings. 11 U.S.C. Section 1501(a). It is based on the Model Law on Cross Border Insolvency prepared by the United Nations Commission on International Trade Law and has been crafted to provide for the fair and efficient administration of cross-border insolvencies. A debtor that seeks to facilitate a foreign bankruptcy case may file a petition initiating a Chapter 15 case and seek the assistance of a U.S. court on insolvency-related issues.
In most Chapter 15 cases, a threshold issue will be whether the U.S. bankruptcy court will grant recognition of the foreign bankruptcy case as a “foreign main proceeding.” In order to grant recognition, the U.S. bankruptcy court must determine that (1) the foreign bankruptcy is a foreign main proceeding under Bankruptcy Code section 1502; and (2) the foreign representative applying for recognition is a proper representative of the debtor. 11 U.S.C.Section 1517.
A “foreign main proceeding” is a foreign proceeding in the country where the debtor has its center of main interests (COMI). 11 U.S.C. Section 1502(4). Although Chapter 15 does not define COMI, courts generally equate COMI to the debtor’s “principal place of business” under United States law. E.g., In re British Am. Ins. Co., 425 B.R. 884, 909 (Bankr. S.D. Fla. 2010). An entity’s registered office or an individual’s habitual residence is rebuttably presumed to be the debtor’s COMI. 11 U.S.C. Section 1516(c).
A “foreign representative” is defined by section 101(24) to include a person or body appointed or authorized to administer or liquidate the debtor’s assets or affairs. A foreign representative may be appointed by the debtor’s board of directors, and need not be appointed by the foreign court. E.g., In re Bd. of Dirs. of Hopewell Int’l Ins., Inc., 275 B.R. 699, 707 (S.D.N.Y. 2002). Section 101(24) simply requires that such representative be “authorized” to administer the reorganization or the liquidation of the debtor’s assets or affairs or act as a representative of the foreign proceeding in a Chapter 15 case.
Recognition, or any act for which recognition is sought, is subject to the “public policy test” of section 1506. A court may refuse recognition “if the action would be manifestly contrary to the public policy of the United States.” 11 U.S.C. Section 1506. However, this exception is narrowly construed and “is intended be invoked only under exceptional circumstances concerning matters of fundamental importance for the United States.”E.g., Lavie v. Ran (In re Ran), 607 F.3d 1017, 1021 (5th Cir. 2010).
II. Impact of Recognition
A Chapter 15 debtor that obtains “recognition” of its foreign insolvency proceeding as a foreign main proceeding, by statute, receives certain of the protections afforded to U.S. debtors under the Bankruptcy Code. Among these protections are (1) the imposition of the automatic stay with respect to actions affecting, among other things, the debtor’s U.S. business operations; and (2) the ability to continue to operate the debtor’s business in the United States. 11 U.S.C Section 1520. The automatic stay facilitates the foreign insolvency proceeding by, among other things, preventing creditors from taking action against the debtor’s assets in the U.S. and preventing other creditor efforts to interfere with the debtor’s attempt to reorganize under the laws of its home jurisdiction.
Chapter 15 recognition also gives U.S. bankruptcy courts the power to provide “additional assistance” to a foreign representative under the Code or other U.S. laws. 11 U.S.C. §§ 1507, 1521. Under section 1507(b), the bankruptcy court must consider several factors, including the standards of international comity, before deciding whether to grant additional assistance. Relief requested by foreign debtors as “additional assistance” under Chapter 15 often includes the ordering of formal discovery or the application of other Bankruptcy Code provisions to the Chapter 15 case. E.g., In re RSM Richter Inc. v. Aguilar (In re Ephedra Prods. Liab. Litig.), 349 B.R. 333 (S.D.N.Y. 2006). Ultimately, a U.S. bankruptcy court may provide additional assistance to the foreign debtor’s home bankruptcy case by issuing an order enforcing the terms and conditions of an approved foreign reorganization plan or by facilitating the liquidation of the debtor’s assets.
With the expansion of international trade and finance, there is an increasing need for a uniform approach to insolvency and cross-border reorganizations. Congress’ adoption of Chapter 15, along with the adoption of similar statutes in foreign jurisdictions, implements a mechanism to facilitate cooperation among courts charged with administering bankruptcy cases across international borders.
David Bennett (David.Bennett@tklaw.com) is a Partner at Thompson & Knight and Katie Battaia Clark (Katie.Clark@tklaw.com) and Cassandra Ann Sepanik (Cassandra.Sepanik@tklaw.com) are Associates at the firm.