Chapter 15 of the Bankruptcy Code Overview

Bankruptcy Chapter 15 Purpose

Bankruptcy Code Chapter 15 was designed to promote cooperation and coordination between courts in two or more countries presiding over bankruptcy or insolvency proceedings involving the same debtor. To facilitate this purpose, the United States bankruptcy court, and, with court supervision, any bankruptcy trustee or examiner, are authorized to communicate directly with a foreign court or a foreign representative. Cooperation may take the form of, for instance, communication of information, coordinated administration and supervision of the debtor’s assets and affairs and the implementation of agreements concerning the coordination of parallel proceedings.

Chapter 15 of the Bankruptcy Code

Chapter 15 of the Bankruptcy Code became effective as part of the comprehensive bankruptcy reforms implemented under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  The still relatively new chapter 15 governs crossborder bankruptcy and insolvency cases and is patterned after the Model Law on Cross-Border Insolvency (the “Model Law”), a framework of legal principles formulated by the United Nations Commission on International Trade Law (“UNCITRAL”).  The United States is one of eighteen countries that have adopted some form of the Model Law.  Both the Model Law and chapter 15 recognize the increasing incidence of cross-border insolvencies, due to the increased interconnectedness of economies, which has led to a greater need for domestic insolvency laws to predictably address crossborder cases.

Chapter 15 replaced section 304 of the Bankruptcy Code.  The prior section 304 allowed an accredited representative of a debtor in a foreign insolvency proceeding to commence a limited “ancillary” bankruptcy case in the United States to enjoin actions against the foreign debtor or its assets located in the United States.  Its purpose was to provide American courts with the authority to provide any necessary assistance to assure the economic and expeditious administration of foreign insolvency proceedings. Under chapter 15, that practice is continued but with new rules and procedures that intentionally have a much broader impact.  Unique among the chapters of the Bankruptcy Code, chapter 15 straightforwardly states its purpose: “to provide effective mechanisms for dealing with cases of cross-border insolvency” consistent with the following objectives:

• Cooperation between United States and non- United States courts and related functionaries; • Greater legal certainty for trade and investment;
• Fair and efficient administration of crossborder cases in a way that protects the interests of all interested parties;
• Protection and maximization of the value of the debtor’s assets; and
• Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

Procedure

Commencing the Case

Before a chapter 15 case can be filed, there must be a pending foreign insolvency proceeding and a duly authorized representative of that proceeding seeking recognition in the United States.  A chapter 15 case is commenced when the accredited representative files a petition in an American bankruptcy court seeking “recognition” of a “foreign proceeding.”  “Foreign Proceeding” is defined 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.”  As will be discussed more fully below, a foreign representative must obtain recognition of the foreign proceedings to acquire the rights and benefits of chapter 15, including protection of the foreign debtor’s U.S. assets from creditors and access to and relief from the United States courts on most matters.

As in other bankruptcy proceedings, certain parties must be notified of the chapter 15 filing and the relief sought therein upon the filing of the petition.100 The bankruptcy court generally holds a hearing (the “recognition hearing”) within 30 days of the chapter 15 filing to determine whether the proceeding should be recognized as a “foreign main” or “foreign nonmain” proceeding. This determination has important implications for how the case will proceed.

Recognition as a Foreign Main Proceeding

Chapter 15 contemplates two types of foreign proceedings—”foreign main proceedings” and “foreign nonmain proceedings.” A foreign main proceeding “means a foreign proceeding pending in the country where the debtor has the center of its main interests” (“COMI”).  A foreign nonmain proceeding is a “foreign proceeding . . . pending in a country where the debtor has an establishment.”  These provisions recognize that more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries.

Recognition as a foreign main proceeding requires a case pending in the debtor’s COMI. The Bankruptcy Code does not define COMI, however. Instead, section 1516(c) provides that the debtor’s registered office or habitual residence, in the case of an individual, is presumed to be the debtor’s COMI.104 The statute’s legislative history indicates that presumption was included “for speed and convenience of proof where there is no serious controversy.” In the absence of a provision in the Bankruptcy Code specifying what constitutes COMI for a corporate debtor,  various factors have been deemed relevant by courts and commentators in examining COMI, including the location of the debtor’s headquarters, managers, employees, investors, primary assets or creditors and which jurisdiction’s law would apply to most disputes.107 Additionally, chapter 15 expressly directs courts to look to the interpretation of COMI by foreign jurisdictions under similar statutes for guidance. 108 Examples of such statutes would include the EU Regulation and the UK Cross-Border Insolvency Regulation of 2006. The EU Regulation provides that COMI “should correspond to the place where the debtor conducts the administration of his interest on a regular basis and is therefore ascertainable by third parties.”  This concept is equivalent to “principal place of business” under American law.

The Recognition Process and Interim Relief

As a practical matter, recognition under chapter 15 is a prerequisite to nearly any kind of extended judicial relief for a foreign debtor in the United States.  If the United States bankruptcy court is provided with sufficient evidence establishing the legitimacy of a pending foreign bankruptcy proceeding, it “shall” enter an “order of recognition.” If the court refuses to recognize a foreign proceeding under chapter 15, it has the power to issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from other United States courts, although the representative may still sue in American courts to collect on claims belonging to the debtor and does not need bankruptcy court authority to act extra-judicially on behalf of the debtor in the United States.

Before the court’s recognition decision is finalized, it may grant certain kinds of provisional relief. Section 1519 authorizes the court, “where relief is urgently needed to protect the assets of the debtor or the interests of the creditors,” to stay any execution against the debtor’s assets, entrust the administration of the debtor’s assets to a foreign representative, or suspend the right to transfer, encumber or otherwise dispose of any of the debtor’s assets. Any provisional relief granted pending approval of a request for recognition terminates when the court rules on the request, unless the court expressly orders otherwise.

Effect of Recognition as a Foreign Main Proceeding

Upon recognition, certain provisions of the Bankruptcy Code automatically become effective, and others may be authorized by way of “additional assistance” upon request of the foreign representative. For instance, and perhaps most significantly, the automatic stay under section 362 of the Bankruptcy Code is immediately triggered, preventing creditor collection efforts with respect to the debtor or its assets located in the United States. Entities asserting an interest in the debtor’s United States assets also become entitled to “adequate protection” of that interest,122 and the debtor’s ability to use, sell or lease its United States property outside the ordinary course of its business becomes restricted.

To the extent that additional relief is needed a court may provide “additional assistance.” “Additional assistance” must be designed to reasonably assure, among other things, that (i) all stakeholders are treated fairly, (ii) United States creditors are not prejudiced by asserting their claims in the foreign proceeding, (iii) the debtor’s assets are not preferentially or fraudulently transferred, (iv) proceeds of the debtor’s assets are distributed substantially in accordance with the order prescribed by the Bankruptcy Code, and (v) if appropriate, an individual foreign debtor is given the opportunity for a fresh start.124

Once a foreign main proceeding is recognized by the bankruptcy court, the foreign representative is authorized to operate the debtor’s business in much the same way as a chapter 11 debtor-in-possession. The foreign representative may also commence a fullfledged bankruptcy case under any other chapter of the Bankruptcy Code, so long as the foreign debtor is eligible to file for bankruptcy in the United States and the debtor has United States assets. Generally, any “person” that “resides or has a domicile, a place of business, or property” in the United States can file for bankruptcy in the United States. However, though the foreign representative obtains many of the powers given to a trustee under other chapters, he cannot invalidate preferential or fraudulent asset transfers or obligations under United States bankruptcy law, unless a case under another chapter of the Bankruptcy Code is pending against the debtor. The foreign representative may also intervene in any court proceedings in the United States in which the foreign debtor is a party, and can sue and be sued in the United States on the foreign debtor’s behalf.

Chapter 15 was designed to promote cooperation and coordination between courts in two or more countries presiding over bankruptcy or insolvency proceedings involving the same debtor. To facilitate this purpose, the United States bankruptcy court, and, with court supervision, any bankruptcy trustee or examiner, are authorized to communicate directly with a foreign court or a foreign representative. Cooperation may take the form of, for instance, communication of information, coordinated administration and supervision of the debtor’s assets and affairs and the implementation of agreements concerning the coordination of parallel proceedings.

Chapter 15 also creates a mechanism to coordinate proceedings in a case where more than one bankruptcy case is commenced with respect to a foreign debtor in the United States. For example, if a chapter 7 or 11 case is instituted against the foreign debtor either before or after the petition for recognition is filed, the chapter 15 court must ensure that any relief it grants is consistent with the relief granted in the United States case under another chapter. The bankruptcy court is also entrusted with coordinating foreign nonmain proceedings with foreign main proceedings.

In addition, chapter 15 establishes rules to account for the possibility that creditors of a foreign debtor may have received full or partial satisfaction of their claims from sources outside of the United States. Chapter 15 provides that “[w]ithout prejudice to secured claims or rights in rem, a creditor who has received payment with respect to its claim in a foreign proceeding pursuant to a law relating to insolvency may not receive a payment for the same claim in a case under any other chapter of [the U.S. Bankruptcy Code] regarding the debtor, so long as the payment to other creditors of the same class is proportionately less than the payment the creditor has already received.”

Chapter 15 expressly gives foreign creditors a significant degree of access and protection. For example, foreign creditors have the same rights as domestic creditors regarding the commencement of, and participation in, a case under the Bankruptcy Code.137 The law, however, is ambiguous as to the priority of foreign unsecured creditors’ claims. 138 It merely provides that “the claim of a foreign creditor under [sections 507 or 726] shall not be given a lower priority than that of general unsecured claims without priority solely because the holder of such claim is a foreign creditor.” Likewise, chapter 15 does not require that United States creditors enjoy the same rights, priorities or recoveries to which they would be entitled in a case under another chapter of the Bankruptcy Code. Instead, as one commentator has noted, it provides that all creditors “be treated in a manner that is fair and reasonable in the context of the global financial crisis that has engulfed the debtor’s estate.” This treatment of claims mirrors the treatment provided in the Model Law.

*Excerpts from and special thanks to “The Other Chapters: Chapter 9 and Chapter 15” by Gregory M. Gordon and Michael E. Imber (2012)