Cross-Border Bankruptcy in 2013: 10 Decisions Shaping Chapter 15

Chapter 15 of the US Bankruptcy Code, addressing cross-border bankruptcy cases, is fewer than 10 years old, but the cumulative volume of Chapter 15 cases has become substantial. In 2013 alone, 38 Chapter 15 cases (or groups of related cases) were filed, including 17 in Delaware, 14 in the Southern District of New York, and 3 in the Southern District of Florida. Of those cases, 24 were related to Canadian foreign proceedings and most of the balance were related to UK and European foreign proceedings.

The accumulation of Chapter 15 cases brings with it an evolution of the substantive case law defining the contours of cross-border practice in the United States. This alert describes ten reported decisions from the past year, all issued in or relating to Chapter 15 cases, which highlight the evolving nature of cross-border practice and provide some guidance on how cross-border insolvency will be treated in US courts moving forward. These decisions fall roughly into three categories-decisions addressing whether a Chapter 15 case may proceed, decisions addressing what relief may or must be available within a Chapter 15 case, and decisions addressing whether Chapter 15 provides the sole route to recognition of foreign insolvency orders in US federal courts.

Barriers to Entry: What It Takes to Sustain a Chapter 15 Case in the US

Four Chapter 15 decisions in 2013 addressed the question of when a Chapter 15 case may proceed in the US courts.

Generally speaking, Chapter 15 is thought to be an inclusive chapter of the US Bankruptcy Code, being relatively liberal in permitting cross-border ancillary cases to proceed in US courts to address US assets and creditors. But at the end of 2013, the Second Circuit Court of Appeals held that the requirements to qualify as a debtor under the US Bankruptcy Code generally, found in Section 109, also apply to foreign debtors under Chapter 15. In re Barnet, 737 F.3d 238 (2d Cir. 2013). As a result, a foreign debtor must have a place of business or assets in the United States in order to be eligible for Chapter 15 recognition. Even if a foreign debtor has substantial US creditors, a Chapter 15 case may not be employed to enjoin those creditors from enforcing rights against a foreign debtor with no US place of business or assets.1 The threshold for assets sufficient to satisfy Section 109 is so low under prevailing case law that the requirement for a foreign debtor to have US assets seems easily satisfied in most instances. Still, this Second Circuit decision aligns with the principle, stated in other Chapter 15 jurisprudence, that the primary role of Chapter 15 is for US courts to further within US borders the foreign debtor's main insolvency proceeding-not for US courts to reach out from the United States and provide purportedly extraterritorial rulings.2 In this way, the Second Circuit's decision appears to be part of a trend toward circumscribing the geographical scope of Chapter 15.

On the other hand, the Southern District of New York Bankruptcy Court held, a few weeks before the Barnet decision, that insolvency of a foreign debtor is not a prerequisite to a Chapter 15 case, notwithstanding the use of the word "insolvency" in the definition of "foreign proceeding" under Section 101(23) of the US Bankruptcy Code. Just as with debtors in plenary Chapter 11 cases in the United States, foreign debtors under Chapter 15 need not be insolvent, so long as insolvency was not a prerequisite to the proceeding under which the foreign debtor's financial affairs are being addressed in its "home" jurisdiction. In re Millard, 501 B.R. 644 (Bankr. S.D.N.Y. 2013). In that same case, the court also held that a Cayman liquidation proceeding is not "manifestly contrary" to US public policy, and therefore does not run afoul of Section 1506 of Chapter 15, even though a Cayman liquidation may be carried on for the primary or sole purpose of challenging a judgment obtained by a creditor against the debtor, rather than for the administration of creditor claims generally. Finally, the court found that there is no "good faith" requirement for recognition of a foreign proceeding...