United States: Foreign Debtor's COMI Shift Dooms Bid For Chapter 15 Recognition

Last Updated: September 11 2019
Article by Dan T. Moss and Mark G. Douglas

In In re O'Reilly, 598 B.R. 784 (Bankr. W.D. Pa. 2019), the U.S. Bankruptcy Court for the Western District of Pennsylvania denied the petition of a foreign bankruptcy trustee for recognition under chapter 15 of the Bankruptcy Code of a debtor's Bahamian bankruptcy case. Although the Bahamian bankruptcy was otherwise eligible for chapter 15 recognition, the U.S. bankruptcy court held that the debtor's "center of main interests" was no longer in the Bahamas when the Bahamian bankruptcy trustee filed the chapter 15 petition and that the trustee failed to demonstrate that the debtor even had an "establishment" there. In so ruling, the bankruptcy court agreed with the Second and Fifth Circuits that the point in time for determining whether a "foreign proceeding" is "main" or "nonmain" is the chapter 15 petition date, rather than the filing date of the foreign bankruptcy proceeding.

Procedures and Recognition Under Chapter 15

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."

"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. Section 1517(b) of the Bankruptcy Code accordingly provides that a "foreign proceeding shall be recognized ... as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; or ... as a foreign nonmain proceeding if the debtor has an establishment ... in the foreign country where the proceeding is pending" (emphasis added) (see also 11 U.S.C. §§ 1502(4) and 1502(5) (defining "foreign main proceeding" and "foreign nonmain proceeding," respectively)).

The Bankruptcy Code does not define "center of main interests" ("COMI"). However, section 1516(c) provides that, "[i]n 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 debtor's COMI.

An "establishment" is defined in 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 (Bankr. S.D. Fla. 2010). The debtor's foreign representative bears the burden of demonstrating that the debtor has an establishment in a particular jurisdiction. Id. at 915.

Various factors have been deemed relevant by courts in determining a debtor's COMI, including the location of the debtor's headquarters, managers, employees, investors, primary assets, or creditors, as well as the jurisdiction whose law would apply to most of the debtor's disputes. See In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), aff'd, 371 B.R. 10 (S.D.N.Y. 2007). In addition, courts have considered any relevant activities, including liquidation activities and administrative functions. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). Courts may also consider the situs of the debtor's "nerve center," including the location from which the debtor's "activities are directed and controlled, in determining a debtor's COMI." Id. at 138. "[R]egularity and ascertainability" by creditors are also important factors in the COMI analysis. Id.

If the foreign debtor is an individual, section 1516(c) provides that the debtor's COMI is presumed to be in the location of the debtor's "habitual residence." The Bankruptcy Code does not define this term, but courts generally equate it with the concept of "domicile," which is established by "physical presence in a location coupled with an intent to remain there indefinitely." In re Ran, 607 F.3d 1017, 1022 (5th Cir. 2010) (citing factors to consider in determining habitual residence); accord In re Pirogova, 593 B.R. 402, 409 (Bankr. S.D.N.Y. 2018) (same); In re Kemsley, 489 B.R. 346, 353 (Bankr. S.D.N.Y. 2013).

COMI can sometimes be found to have shifted, or "migrated," from a foreign debtor's original principal place of business or habitual residence to a new location. See Pirogova, 593 B.R. at 410; In re Creative Finance Ltd. (In Liquidation), 543 B.R. 498 (Bankr. S.D.N.Y. 2016). In Fairfield Sentry, the Second Circuit ruled that, due principally to the present verb tense of the language of section 1517, the relevant time for assessing COMI is the chapter 15 petition date, rather than the date a foreign insolvency proceeding is commenced with respect to the debtor. The Fifth Circuit previously reached the same conclusion in Ran, as did the bankruptcy court in British American.

In Fairfield Sentry, the Second Circuit also expressed concern about possible COMI "manipulation," ruling that a court "may look at the period between the commencement of the foreign proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith." Fairfield Sentry, 714 F.3d at 138; see also In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017) (ruling that scheme of adjustment proceedings pending in the Cayman Islands should be recognized as "foreign main proceedings" under chapter 15, even though the debtors' COMI had been shifted to the Caymans less than a year before the proceedings were commenced, because the country in which the debtors' COMI had previously been located did not have a law permitting corporate restructurings), appeal dismissed, 585 B.R. 31 (S.D.N.Y. 2018), aff'd, 2019 WL 1276205 (2d Cir. Mar. 19, 2019).

Injunctive Relief Available Upon Recognition

Upon recognition of a foreign main proceeding, section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets. If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, section 1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor's assets or otherwise provide assistance to the court or other entity presiding over the debtor's foreign proceeding. Under section 1521(a)(1), such relief can include "staying the commencement or continuation of an individual action or proceeding concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a)."

O'Reilly

In 2015, Anthony O'Reilly (the "debtor"), who was once the chairman and CEO of H.J. Heinz Co., filed a bankruptcy case under the Bahamian Bankruptcy Act of 1870 (the "BBA") in the Supreme Court of the Commonwealth of the Bahamas.

At the time of the bankruptcy filing, litigation was pending against the debtor in the U.S. District Court for the Western District of Pennsylvania in which the plaintiff—the debtor's former personal nurse and assistant, Sabina Vidunas ("Vidunas")—was seeking damages for breach of contract. Although she and her legal counsel were notified of the debtor's Bahamian bankruptcy filing, Vidunas declined to file a proof of claim or otherwise participate in the case.

In November 2018, the debtor's Bahamian bankruptcy trustee filed a petition in the U.S. Bankruptcy Court for the Western District of Pennsylvania seeking recognition of the Bahamian bankruptcy case under chapter 15 as a foreign main proceeding, as well as a determination that the automatic stay barred continuation of the U.S. district court litigation. Alternatively, the trustee sought recognition of the Bahamian bankruptcy as a foreign nonmain proceeding and asked the U.S. bankruptcy court to exercise its discretion under section 1521(a) to stay the litigation from continuing. On the chapter 15 petition date, the debtor's Bahamian assets had largely been liquidated, and the debtor was living in France.

Vidunas objected to the petition for recognition. She claimed that the Bahamian bankruptcy case did not qualify as a "foreign proceeding" because it was not "collective in nature," as required by section 101(23) of the Bankruptcy Code. According to Vidunas, the reasons the Bahamian bankruptcy was not "collective in nature" included the following: (i) she was not afforded proper notice of, and an opportunity to participate in, the bankruptcy case; (ii) only the Bahamian trustee had the right to obtain discovery in the bankruptcy case; and (iii) there was "little oversight" of the trustee's determinations regarding the allowance or disallowance of claims.

Vidunas also claimed that even if the court should decide to recognize the Bahamian bankruptcy as a foreign nonmain proceeding, the trustee failed to demonstrate why the court should exercise its discretion to stay the district court litigation.

The Bankruptcy Court's Ruling

Initially, the U.S. bankruptcy court concluded that the Bahamian bankruptcy was a "foreign proceeding" that could be recognized under chapter 15. The court noted that "the gist of [Vidunas's] objection is that the [BBA] is allegedly antiquated and different from the bankruptcy process in the United States." The court explained that in keeping with the purpose of chapter 15—and the Model Law on Cross-Border Insolvency (the "Model Law"), on which it is patterned—recognition does not require the law governing a foreign bankruptcy proceeding to "mirror" the law applied by the recognizing court.

The court deemed unfounded Vidunas's claims that the Bahamian bankruptcy was not collective in nature, explaining that the main test for collectivity is "whether all creditors' interests are considered in the proceeding" (citing Armada (Singapore) Pte Ltd. v. Shah (In re Ashapura Minechem Ltd.), 480 B.R. 129, 140 (S.D.N.Y. 2012)). According to the bankruptcy court, cases under the BBA clearly satisfy that test. The court found that the law "contains a number of provisions," including provisions establishing a test for eligibility, imposing an automatic stay, establishing procedures for the filing and allowance of claims, creating priorities for claims, and discharging the debtor, "that are similar to the United States Bankruptcy Code."

The bankruptcy court also found meritless Vidunas's contentions regarding the inadequacy of notice or her inability to participate in the Bahamian bankruptcy case. According to the court, she was clearly provided with adequate notice of the bankruptcy filing, and the BBA contains both procedural and substantive protections for safeguarding such interests.

Even so, the bankruptcy court refused to recognize the Bahamian bankruptcy case under chapter 15 as either a foreign main proceeding or a foreign nonmain proceeding.

Citing Fairfield Sentry and Ran, the bankruptcy court concluded that the point in time for determining whether a foreign proceeding is main or nonmain is the chapter 15 petition date, rather than the filing date for the foreign bankruptcy proceeding. This conclusion, the O'Reilly court noted, is supported by the language of section 1517.

The court wrote that establishing the chapter 15 petition date as "the presumptive temporal lens for ascertaining whether recognition is permissible" creates a standard that is both objective and ascertainable by third parties. Such a presumption is also warranted for the "prudential reason" that it "encourage[s] ... swift prosecution and/or resolution of cross-border insolvency cases." The court explained that prompt action by litigants "avoids the 'Never Never Land' problem which can be occasioned by the shifting sands of where a debtor's domicile, principal place of business, and/or assets and liabilities are primarily located in the ensuing years" after the filing of a foreign bankruptcy case.

The bankruptcy court noted that the "presumptive date" is rebuttable "in instances where the debtor has manipulated its center of main interests or establishment in bad faith between the time period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition."

The bankruptcy court refused to recognize the Bahamian bankruptcy as a foreign main proceeding because it determined that the debtor's COMI on the chapter 15 petition date was not located in the Bahamas. The trustee acknowledged that the debtor's habitual residence was in France, where he had lived with his wife for several years. The court also found that the (now elderly) debtor had no intention of returning to the Bahamas and had no physical presence in, or family ties to, the Bahamas, even though certain of his assets had been liquidated there by the trustee.

The bankruptcy court also denied recognition of the Bahamian bankruptcy as a foreign nonmain proceeding. According to the court, the trustee failed to meet his burden of producing evidence demonstrating that the debtor maintained an "establishment" in the Bahamas at the time of the chapter 15 filing. However, the court denied recognition without prejudice to renewal of the petition supported by additional evidence.

Outlook

"Migrating," or "shifting," COMI is increasingly common amid the proliferation of bankruptcy cases involving debtors with operations, residences, assets, creditors, or debt in multiple countries that have enacted some form of the Model Law. In some cases, the phenomenon represents a calculated strategy for finding the jurisdiction with the most favorable bankruptcy or restructuring laws. Such COMI "manipulation" may or may not be countenanced by the courts involved, depending upon the debtor's motives and/or the extent of its contacts with the chosen venue. As emphasized by the bankruptcy court in O'Reilly, recognition of a foreign insolvency proceeding in the United States is by no means a "rubber stamp exercise."

Other cases of COMI migration may be more benign. This would appear to be the case in O'Reilly, where the foreign representative did not seek recognition in the U.S. of the debtor's bankruptcy proceeding until years after the case had been filed and the debtor no longer resided in, or had any contacts with, the country in which the case was pending. This creates a dilemma for foreign debtors, their bankruptcy representatives, and creditors in cases where a debtor's COMI has shifted from the jurisdiction in which its bankruptcy estate is being administered prior to the filing of a chapter 15 petition. As O'Reilly demonstrates, absent another bankruptcy filing in the debtor's COMI jurisdiction or sufficient contacts in the previous jurisdiction to support an "establishment," chapter 15 recognition in the United States may not be possible.

Finally, O'Reilly illustrates the importance of establishing an adequate evidentiary record to support each of the elements of chapter 15 recognition, regardless of any presumptions created by chapter 15 or case law interpreting it.

The trustee renewed his petition for recognition of the debtor's Bahamian bankruptcy case as a foreign nonmain proceeding. On June 11, 2019, the parties agreed to mediate the dispute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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