Summary and Introduction
The economic carnage wrought by the worldwide coronavirus pandemic will inevitably lead to a rash of bankruptcy filings in the months and years to come, as businesses struggle to recover from the toll taken by this insidious virus. For example, there will no doubt be many shippers, consignees and carriers who experience financial difficulties, leading to delivery problems and accounts payable issues, among other things, causing a spate of bankruptcies and similar insolvency proceedings, both domestic and foreign. For that reason, it behooves all business leaders and transportation industry professionals to become familiar with the basics of Chapter 15 of the United States Bankruptcy Code, which governs cross-border insolvency cases, that is, bankruptcy cases where the foreign insolvency proceeding is the main proceeding and the U.S. proceeding is an ancillary proceeding. Chapter 15 replaced the former Section 304 of the Bankruptcy Code, which previously covered ancillary proceedings.
In international trade and transportation, industry professionals likely have already encountered a situation where a foreign company in the logistics or supply chain became insolvent and instituted an insolvency proceeding somewhere other than in the United States. However, since the foreign entity had property in the United States that it wished to protect, it also filed a bankruptcy petition in the United States under Chapter 15 of the United States Bankruptcy Code.
For example, in 2016, never having fully recovered from the Great Recession, the international shipping company, Hanjin Shipping Co., Ltd. (“Hanjin”), filed an Application in South Korea under South Korea’s Debtor Rehabilitation and Bankruptcy Act (the “DRBA”). The DRBA is similar to Chapter 11 of the U.S. Bankruptcy Code, which allows for reorganization or liquidation. A custodian, similar to a trustee in bankruptcy, was appointed by the Seoul Central District Court. A Stay Order and a Commencement Order were entered in the Korean proceeding.
Due to the fact that many of its owned or chartered vessels were scheduled to make port in the United States, and to avoid subjecting its vessels to maritime arrest or attachment proceedings, as well as to facilitate orderly delivery of goods and other cargo carried on its container ships, Hanjin then filed a Chapter 15 bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey. The custodian in the Korean foreign main proceeding was appointed the foreign representative in the U.S. Chapter 15 case, and the case proceeded accordingly.
The Purpose of Chapter 15
Chapter 15 is a recognition proceeding of a foreign main proceeding. According to Section 1501(a):
“The purpose of this chapter is to incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of–
(1) cooperation between—
(A) courts of the United States, United States trustees, examiners, debtors, and debtors in possession; and
(B) the courts and other competent authorities of foreign countries involved with cross-border insolvency cases;
(2) greater legal certainty for trade and investment;
(3) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor;
(4) protection and maximization of the value of the debtor’s assets; and
(5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.”
Application of Chapter 15
Chapter 15 is designed to protect a foreign debtor’s assets in the U.S. while it tries to reorganize in the main proceeding in the place that is the “center of main interest.” Unlike in a Chapter 11 case, there is no “estate” in bankruptcy.
Section 1501(b) states that:
“(b) This chapter applies where—
(1) assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding;
(2) assistance is sought in a foreign country in connection with a case under this title;
(3) a foreign proceeding and a case under this title with respect to the same debtor are pending concurrently; or
(4) creditors or other interested persons in a foreign country have an interest in requesting the commencement of, or participating in, a case or proceeding under this title.”
Chapter 15’s Framework for Recognition of Foreign Proceedings
Under Chapter 15 of the United States Bankruptcy Code, a case ancillary to a foreign proceeding is commenced by filing a petition for recognition of a foreign proceeding. A foreign proceeding is defined as: (i) a proceeding; (ii) that is either judicial or administrative; (iii) that is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to insolvency or the adjustment of debts; (vi) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation.
For a foreign proceeding to gain recognition under Chapter 15, the individual or entity seeking recognition must be a “foreign representative,” defined as a person authorized in a foreign proceeding to administer the reorganization or liquidation of a debtor’s assets or affairs or to act as a representative of such a foreign proceeding.
Chapter 15 provides as follows regarding recognition of foreign proceedings:
(a) Subject to section 1506, after notice and a hearing, an order recognizing a foreign proceeding shall be entered if—
(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the petition meets the requirements of section 1515
(b) Such foreign proceeding shall be recognized—
(1) as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; or
(2) as a foreign nonmain proceeding if the debtor has an establishment within the meaning of section 1502 in the foreign country where the proceeding is pending.
The decision whether to grant recognition is not dependent upon any finding about the nature of the foreign proceeding. If the three requirements of Section 1517(a) are met, the court is obliged to grant recognition.
“Foreign main proceeding” means a foreign proceeding pending in the country where the debtor has the center of its main interests. The Bankruptcy Code does not define center of main interest. However, the Bankruptcy Code provides that, in 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 center of the debtor’s main interests. While the Bankruptcy Code does not define “habitual residence,” courts interpret it to mean the debtor’s domicile, that is, physical presence in a location coupled with intent to remain there indefinitely.
Recognition of a foreign representative and as foreign proceeding as a foreign main proceeding provides the foreign representative with the right of direct access to courts in the United States. In addition, recognition permits the court to entrust the administration or realization of the debtor’s assets located in the United States to the foreign representative.
Chapter 15 permits the court to entrust the distribution of the debtor’s assets located in the United States to the foreign representative, provided that the court is satisfied that the interests of creditors in the United States will be sufficiently protected.
Refusal of Recognition in a Chapter 15 Case
Chapter 15 provides that a court may refuse to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States. Courts have held that Congress’s use of the word “manifestly” requires the statute to be interpreted restrictively. Accordingly, Section 1506 should be invoked only under exceptional circumstances concerning matters of fundamental importance to the United States. Id.
In deciding whether to deny recognition of a foreign proceeding, courts have focused on two factors: (1) whether the foreign proceeding was procedurally unfair; and (2) whether the application of foreign law or the recognition of the foreign main proceeding under Chapter 15 would severely impinge the value and import of a United States statutory or constitutional right, such that granting comity would severely hinder United States bankruptcy courts’ ability to carry out the most fundamental policies and purposes of these rights.
Eligibility for Chapter 15
Section 109(a) of the Bankruptcy Code sets forth the requirements to be eligible to be a debtor under the Bankruptcy Code. Section 109(a) provides in pertinent part that “[n]ot withstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States … may be a debtor under this title.”
Section 109(a) applies to Chapter 15 proceedings. An entity or individual must be eligible to be a debtor under Section 109(a) before the court can grant recognition of its foreign proceeding. Bankruptcy courts have found that Section 109(a) sets a low bar to satisfy the eligibility requirements. Section 109(a) does not specify how much property must be present or when or for how long property has been present and located in the United States. Bank accounts, attorney retainers deposited in a bank in the U.S., or causes of action owned by a foreign debtor with a physical presence in the United States have all satisfied the eligibility requirement to have property in the United States. Id.
Property of the Debtor in a Chapter 15 Case
Upon the filing of a bankruptcy petition under Chapters 7, 11, 12 or 13 of the Bankruptcy Code, a bankruptcy estate consisting of all property interests of the debtor is created. However, Section 541 does not apply to Chapter 15 cases. In a Chapter 15 case, there is no “estate” as such. Nonetheless, Section 1502(a) of the Bankruptcy Code imposes an automatic stay of any action with respect to the debtor’s property located in the United States.
The Automatic Stay in a Chapter 15 Case
Upon entry of an order recognizing a foreign main proceeding, Section 1520 of the Bankruptcy Code makes the automatic stay of Section 362 applicable with regard to a stay of actions against property of the debtor within the jurisdiction of the United States. The statute refers to “property of the debtor” to distinguish it from “property of the estate” that is created under Section 541(a). In a Chapter 15 case, there is no estate as such. Nonetheless, Section 1520(a) imposes an automatic stay of actions against the debtor’s property located in the United States.
Avoidance Actions in a Chapter 15 Case
Section 1521(a)(7) of the Bankruptcy Code authorizes the court to grant to the foreign representative the sort of relief that might be available to a trustee appointed in a Chapter 7 or 11 bankruptcy case, including turnover of property belonging to the debtor. However, Section 1521(a)(7) denies the foreign representative avoidance powers under Sections 544, 547 and 548, such as preferences and fraudulent transfers, which powers are available to a trustee under other chapters of the Bankruptcy Code.
Modification of a Recognition Order in a Chapter 15 Case
Section 1517(d) of the Bankruptcy Code provides for terminating or modifying a recognition order. Relief under Section 1517(d) is discretionary. The court may grant relief where: (1) the basis for recognition was flawed in some way or (2) the grounds for recognition have ceased to exist.
Conclusion
If your company ends up on the wrong side of a foreign trade, transaction or transportation arrangement, it will serve you well if you have some understanding of the basics of Chapter 15. Although every situation is different, and requires legal advice, doing so will allow you to handle the situation in a way that will be most beneficial to your company and enhance your professional reputation and experience in the industry, thereby making you more valuable and useful to your company and any other employer.
Rick Steinberg is an attorney that practices in the creditor’s rights and transportation/maritime law sections of the firm. To contact the author call (20) 391 3737, or email him directly
rs********@pr********.com
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RICK A. STEINBERG, ESQ.
PRICE MEESE SHULMAN & D’ARMINIO, P.C.
5O TICE BOULEVARD, SUITE 380
WOODCLIFF LAKE, NJ 07677
