Pushing The Borders Of Chapter 15: When A Foreign Representative 'Flouts' The Purposes Of Cross-Border Insolvency In The United States

The case law interpreting Chapter 15 of the US Bankruptcy Code continues to demonstrate that there are rarely simple answers to the complex issues presented by cross-border insolvency cases. In the recent case of In re Cozumel Caribe, S.A. de C.V.,1 the US Bankruptcy Court for the Southern District of New York held that the legal standard for obtaining access to US bankruptcy courts through Chapter 15 is less exacting than the standard for granting comity in Chapter 15 to specific orders of foreign courts. But, in deciding the case, the court had to grapple with a thornier question that arises in some cross-border insolvency cases: What should a court do "when, after granting recognition to a foreign proceeding, the conduct of the foreign representative, or other parties in interest, flout[s] the purposes of chapter 15"?2

In Cozumel Caribe, the US court found "very serious questions"3 about the conduct of the foreign representative in the Chapter 15 and the Mexican concurso mercantil (commercial bankruptcy) proceedings. But the court nevertheless concluded that Chapter 15 does not permit it to review anew the rulings and conduct of the concurso proceeding. Rather, it found that the proper role for the US court is to decide whether to extend comity to the ultimate results of the Mexican bankruptcy in the United States, if and when such a request is made by the debtor's foreign representative. As a result, the case serves as a stark reminder that, if a foreign debtor seeks no more than an order granting recognition under section 1517 and the automatic effects of recognition under section 1520 of Chapter 15 with respect to US assets, creditors may have to live with the processes and results of a foreign proceeding, no matter how contrary they may be to US interests, law or public policy.

Background

Cozumel Caribe and its affiliates are organized under Mexican law and own resort properties in Mexico. CT Investment Management Co, LLC (CTIM) lent Cozumel Caribe $103 million, secured by Cozumel Caribe's hotel revenues, which were to be deposited into lockbox accounts, one of which is in New York under CTIM's control. Certain of Cozumel Caribe's affiliates also guaranteed Cozumel Caribe's debt under New York law governed guarantees.4

In 2010, Cozumel Caribe (but not its affiliates) filed a concurso in Mexico. Upon the request of Cozumel Caribe, the US bankruptcy court granted Chapter 15 recognition of the Mexican proceeding.5 At the time, the New York lockbox account held about $8 million. Once Cozumel Caribe filed its concurso, both Cozumel Caribe and its guarantors stopped making payments on the debt to CTIM and started to withhold hotel revenues from the lockbox accounts.6

CTIM attempted to recover on its debt, both from the guarantors and from the New York lockbox, in Mexican and US courts. In Mexico, the concurso court stayed any collections from Cozumel Caribe's lockbox accounts or from its guarantors (the May 27 Order).7 In the United States, the bankruptcy court granted comity to stay CTIM's efforts to collect from the New York lockbox,8...