New York Bankruptcy Court Rules That Good Faith Is Not The Gatekeeper To Chapter 15

• Published date: 16 November 2021
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Jones Day
• Author: Ms Corinne Ball, Dan T. Moss, Michael C. Schneidereit, Isel M. Perez and Mark Douglas

Despite the absence of any explicit directive in the Bankruptcy Code, it is well understood that a debtor must file a chapter 11 petition in good faith. The bankruptcy court can dismiss a bad faith filing "for cause," which has commonly been found to exist in cases where the debtor seeks chapter 11 protection as a tactic to gain an advantage in pending litigation. A ruling recently handed down by the U.S. Bankruptcy Court for the Southern District of New York suggests that no such good faith filing requirement applies to a petition seeking recognition under chapter 15 of the Bankruptcy Code of a foreign bankruptcy. In In re Culligan Ltd., 2021 WL 2787926 (Bankr. S.D.N.Y. July 2, 2021), the court granted recognition under chapter 15 to the liquidation proceeding of a Bermuda company despite allegations that the company's court-appointed liquidators filed the chapter 15 petition solely to enjoin shareholder litigation pending in a New York State court. According to the bankruptcy court, although the Bankruptcy Code gives a U.S. court the discretion to deny any chapter 15 relief that is "manifestly contrary" to U.S. public policy, "this exception is not met by a simple finding that the Chapter 15 Petition has been filed as a litigation tactic."

Procedures, Recognition, and Relief Under Chapter 15

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), which has been enacted in some form by more than 50 countries.

Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

Section 109(a) of the Bankruptcy Code provides that, "[n]otwithstanding 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, or a municipality, may be a debtor under [the Bankruptcy Code]." In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit ruled that section 109(a) applies in cases under chapter 15 of the Bankruptcy Code. For purposes of section 109(a), "property in the United States" has been held to include an attorney retainer in a U.S. bank account, causes of action under U.S. law against parties in the United States, and contract rights governed by U.S. law, including U.S. dollar-denominated debt issued under an indenture governed by New York law with a New York choice-of-forum clause. See In re Cell C Proprietary Ltd., 571 B.R. 542 (Bankr. S.D.N.Y. 2017); In re Berau Capital Resources Pte Ltd, 540 B.R. 80 (Bankr. S.D.N.Y. 2015); In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014).

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:

[A] collective judicial or administrative proceeding in a...