Bankruptcy Court In The Southern District Of New York Confirms Low Threshold For Foreign Debtors To Use Chapter 11

On Friday 21 October 2011, the Bankruptcy Court in the Southern District of New York handed down an important decision, confirming that foreign (groups of) companies can use Chapter 11 without any significant threshold as to their nexus with the United States. This may be good news for corporates that seek to use Chapter 11 for restructuring their business or capital structure.

It is now clear that even very limited property in the U.S. is sufficient to qualify for a reorganisation through Chapter 11.

For banks and other creditors the Bankruptcy Court's decision may be bad news. They may be confronted more often with debtors successfully protecting themselves with Chapter 11's automatic worldwide stay against – otherwise legitimate – enforcements on collateral and other recourse actions.

The case On 29 July 2011, the Dutch limited liability company Marco Polo Seatrade B.V. (MPS) and three of its Dutch group companies filed a voluntary petition with the United States Bankruptcy Court in the Southern District of New York, for relief and commencement of cases under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code). The MPS companies own and operate six ocean-going tanker ships. Their principal financing consists of two facilities, the first of approximately USD 90 million, with Crédit Agricole as agent, and the second of approximately USD 118 million, with Royal Bank of Scotland as agent. The facilities are secured by mortgages on the ships.

Before the filing of their Chapter 11 cases, the MPS companies and their banks, predominantly Crédit Agricole, were engaged in out of court negotiations relating to a potential restructuring of the companies' business and capital structure. However, around 21 July 2011 that process apparently broke down: Crédit Agricole had one of the ships mortgaged to it arrested in a UK port and swept certain cash accounts pledged to it by the MPS companies. Eight days later, the MPS companies filed for Chapter 11. Another month later, the MPS companies filed a motion with the Bankruptcy Court for contempt of court sanctions against Crédit Agricole. MPS held that Crédit Agricole was in violation of the automatic worldwide stay (the suspension of enforcements and other recourse actions of creditors against a Chapter 11 debtor that automatically becomes effective when a petition for Chapter 11 is filed).

The contempt of court motion was withdrawn following a settlement between MPS and the banks – pursuant to which the arrested ship was released – but on 12 September 2011, both Crédit Agricole and RBS filed motions in which they (among other things) sought dismissal of MPS's Chapter 11 cases. Their arguments were, in essence, that MPS's cases did not belong in a U.S. court as the companies were foreign, had no sufficient nexus with the U.S. and had only filed their cases in order to benefit from the automatic stay, rather than with any realistic plan for reorganisation.

Chapter 11 for foreign companies – is a peppercorn in the U.S. enough for jurisdiction? Foreign companies have successfully used Chapter 11 in the past. In 2010, for instance, the Almatis group successfully implemented its...