Vol 5 (2008) - Issue 4

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Bankruptcy Court Rulings Establish Parameters for Chapter 15 Eligibility

Introduction

For some time, chapter 15 of the US Bankruptcy Code (the ‘Bankruptcy Code’) was a sleeping giant. Chapter 15, which was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to replace former section 304, sets forth the statutory provisions that permit debtors in non-US insolvency proceedings to obtain ancillary protection through US courts. For nearly a full year after its enactment, there were no noteworthy decisions interpreting chapter 15.

Three recent decisions of the US Bankruptcy Court for the Southern District of New York (the ‘Bankruptcy Court’) have placed chapter 15 in the spotlight. Although these cases are not entirely consistent, viewed together, and considered in chronological order, they demonstrate an evolution in courts’ approach to assessing chapter 15 eligibility. The central teaching of these decisions is that a request for recognition of a foreign proceeding under chapter 15 must be supported by sufficient evidence to establish that the debtor is subject to a non-US insolvency proceeding in a jurisdiction that is either (i) the debtor’s center of main interests (‘COMI’) or (ii) a place where the debtor has an ‘establishment’ (i.e., conducts nontransitory business operations). Depending on the procedural posture of a case, the requisite evidence may be provided through court filings, such as the chapter 15 petition and supporting affidavits, or through live testimony at a recognition hearing. Absent such evidence, courts are likely to withhold chapter 15 protection, whether or not interested parties object to the petition.

Chapter 15 overview

To seek chapter 15 relief, a foreign representative files with the court a petition for recognition of a foreign proceeding. Unlike the procedure under former section 304, the recognition of a foreign proceeding under chapter 15 is based on objective criteria and is not discretionary. The petition for recognition must include, among other things, evidence of the existence of the foreign proceeding and the appointment of the foreign representative, as those terms are defined in the Bankruptcy Code. Where these requirements are met and the foreign proceeding is either a ‘foreign main proceeding’ or a ‘foreign nonmain proceeding,’ the court must enter an order recognising the foreign proceeding.

The Bankruptcy Code defines ‘foreign main proceeding’ as ‘a foreign proceeding pending in the country where the debtor has the center of its main interests.’ Section 1516 provides that, ‘in the absence of evidence to the contrary,’ the debtor’s registered office is presumed to be the center of its main interests. Upon recognition of a foreign main proceeding, certain relief is granted automatically; most significant for the discussion that follows is that the automatic stay provisions of section 362 apply. ‘Foreign nonmain proceeding’ is defined as ‘a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.’ ‘Establishment’ is defined as ‘any place of operations where the debtor carries out a nontransitory economic activity.’