United Nations Climate Change
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A foreign entity facing financial distress may consider seeking relief under the United States Bankruptcy Code. However, not every foreign entity is eligible for bankruptcy relief in the United States. Under section 109(a) of the Bankruptcy Code, “only a person that resides or has a domicile, place of business, or property in the United States” may be a debtor. In 2015, several courts explored a foreign debtor’s eligibility to seek relief under Chapter 11 (a reorganization) and Chapter 15 (recognition of a foreign proceeding). This “year in review” article focusses on the leading debtor-eligibility cases decided in 2015. The article begins by reviewing a decision by the Delaware bankruptcy court dismissing Chapter 11 cases involving a Bahamian resort and concludes with an analysis of two decisions addressing the eligibility of foreign debtors for relief under Chapter 15.
Northshore Mainland Services, Inc., a Delaware corporation, and certain affiliates incorporated in the Bahamas, were owners and developers of a 3.3 million square foot resort complex in the Bahamas. When complete, the debtors anticipated that the resort would create approximately 5,000 jobs with an annual payroll exceeding $130 million. This amount would represent 12% of the GDP of the Bahamas. However, allegedly as a result of the general contractor’s failure to complete the project, the debtors lacked sufficient revenue to make any significant payments on their outstanding debt, including their $2.45 billion secured debt facility. Consequently, the debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware on June 29, 2015. On the same day, the debtors requested recognition of the Chapter 11 cases in the Bahamas where the project and a majority (in number) of the debtors’ creditors were located.
Following the debtors’ commencement of the Chapter 11 cases and the Bahamian proceedings, the Bahamian Attorney General filed a petition in the Bahamas seeking orders winding up the Bahamian debtors’ business and appointing provisional liquidators. The Bahamian Attorney General did not seek an order winding up Northshore (a Delaware corporation). On July 31, 2015, the Bahamian Supreme Court dismissed the debtors’ request for recognition of the Chapter 11 cases finding that the debtors should be the subject of “unitary insolvency proceedings in The Bahamas” given the debtors’ substantial connections to the Bahamas, including that it was the home of their principal place of business and the location of the majority of their creditors and assets. Thereafter, upon the Attorney General’s request, the Bahamian Supreme Court issued orders appointing provisional liquidators for several of the Bahamian debtors.
Meanwhile, in the United States, the debtors’ principal secured creditor and the debtors’ general contractor moved to dismiss the Chapter 11 cases for three reasons. First, they argued that the debtors were not eligible for relief because the debtors had minimal assets in the United States and (with one exception) were not incorporated in the United States. Second, the movants contended that the cases were filed in bad faith as a litigation tactic to avoid insolvency proceeding in the Bahamas. Finally, the movants alleged that it would be in the best interests of the debtors and creditors to dismiss the Chapter 11 cases and allow the parties to proceed in the Bahamas. Each of these arguments is addressed below.
The Debtors Were Eligible for Relief Under the Bankruptcy Code
As an initial matter, the bankruptcy court found that all of the debtors were eligible for relief under the Bankruptcy Code. In particular, each of the debtors, including the Bahamian debtors, had property in the United States in the form of funds in bank accounts in the United States. The court was not troubled by the fact that seven of the debtors opened depository accounts containing $10,000 with a bank in Delaware in the weeks leading up to the filing of the Chapter 11 cases. According to the court, any property (including minimal property) in the United States satisfies the eligibility requirement. Moreover, the bankruptcy filing date (and not a prior date) is the relevant time for determining a debtor’s eligibility. Thus, because each of the debtors had property in the United States as of the filing of the Chapter 11 cases, they were all eligible for relief under the Bankruptcy Code.
The Chapter 11 Cases Were Not Filed in Bad Faith
Notwithstanding that a debtor is eligible for relief under the Bankruptcy Code, a Chapter 11 case may be dismissed for cause under section 1112 if it is filed in bad faith. According to the bankruptcy court, a court should focus on two factors in considering whether a Chapter 11 case was filed in bad faith. First, a court should analyze whether the petition serves a valid bankruptcy purpose. Second, a court should examine whether the petition solely serves as a “tactical litigation advantage.” Here, according to the bankruptcy court, both factors supported a finding that the petitions were not filed in bad faith.
The bankruptcy court found that the debtors were “on the edge of a financial precipice” in the days leading up to the Chapter 11 cases. In particular, the debtors were suffering a liquidity crunch resulting from the contractor’s failure to complete the project and the lack of any significant revenue. In addition, the debtors were facing a potential default on their secured debt, which could have led the secured creditor to exercise remedies against the debtors. The debtors acknowledged that they filed the Chapter 11 cases to use the right to reject executory contracts, to maintain control of and complete the project, and to reorganize. However, according to the bankruptcy court the debtors’ filing were not “patently abusive” or the sort of “tactical advantage” that would equate to bad faith. Accordingly, the bankruptcy court denied the motion to dismiss the Chapter 11 cases as bad faith filings.
The Bahamian Debtors’ Chapter 11 Cases Were Not in the Parties’ Best Interests
Under section 305 of the Bankruptcy Code, a Chapter 11 case may be dismissed if “the interests of creditors and the debtor would be better served by such dismissal.” In determining whether to dismiss a Chapter 11 case under section 305, the court concluded that it should consider the totality of the circumstances, including whether there is an alternative means of achieving an equitable distribution of the debtor’s assets. Here, the movants argued that the debtors and creditors would be better served by having the debtors’ financial distress addressed in the Bahamas because (1) a Bahamian winding up would be more economical and efficient than the Chapter 11 cases and (2) any order entered in the Chapter 11 cases would likely not be enforceable in the Bahamas as evidenced by the Bahamian court’s denial of the debtor’s request for recognition. The debtors disagreed and argued that the Bahamian proceeding would not necessarily be more economical or efficient than the Chapter 11 cases because many of the stakeholders are located outside of the Bahamas. Moreover, according to the debtors, Chapter 11 would provide them with several options and protections that would not be available in a Bahamian winding up, including the option to reorganize (and not simply be liquidated) and the ability to reject its executory contracts with the contractor.
The bankruptcy court was not troubled by the differences between the Bahamian winding up and the Chapter 11 process. Indeed, the court found that the Bahamian court had treated the debtors fairly and that Bahamian law did not contravene United States public policy. Moreover, the court concluded that the debtors would not necessarily be liquidated and could reorganize under Bahamian law. The court was also not influenced by the Bahamian government’s strong interest in the debtors’ future. According to the court, that interest “is no more important than the right of a company incorporated in the United States to have recourse to relief in a United States Bankruptcy Court.” The court, however, was guided by the expectations of the debtors’ stakeholders.
According to the bankruptcy court, many of the debtors’ stakeholders expected any insolvency proceedings involving the resort would occur in The Bahamas. According to the court, the expectations of parties to transactions “should be respected, and not disrupted unless a greater good is to be accomplished.” Because the court did not perceive a greater good in disregarding the parties’ expectations, the court dismissed the Bahamian debtors’ Chapter 11 cases. The court, however, did not dismiss Northshore’s Chapter 11 case because it is a Delaware corporation and therefore parties would have expected that its financial difficulties would be addressed in the U.S. The court nevertheless noted that it would consider a request to dismiss Northshore’s Chapter 11 case if it later became the subject of a Bahamian proceeding.
Contract Rights May Render a Debtor Eligible for Chapter 15 Relief
In its 2013 ruling in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the United States Court of Appeals for the Second Circuit held that a debtor must have a domicile or residence, a place of business, or property in the U.S. for its foreign proceeding to be recognized under Chapter 15. Following that decision, several lower courts in the Second Circuit concluded that an attorney retainer deposited in a bank account in the U.S., as well as causes of action located in the U.S., would satisfy that requirement. In the fourth quarter of 2015, the United States Bankruptcy Court for the Southern District of New York in In re Berau Capital Resources Pte Ltd., 540 B.R. 80 (Bankr. S.D.N.Y. 2015) expanded on property bases of jurisdiction. In that case the bankruptcy court initially confirmed that an attorney retainer in the U.S. satisfied the eligibility requirement. Importantly, the court also concluded (for the first time) that a debtor can satisfy the eligibility requirements by relying on contract rights.
Berau, a Singaporean company, issued U.S. dollar denominated debt under a indenture governed by New York law and that contained a New York forum selection provision. Berau was in default under the indenture when it filed for recognition of its insolvency proceeding pending in Singapore. The bankruptcy court found that a contract created intangible property rights and, thus, Berau had intangible property arising from the indenture. If those rights were located in the U.S., they would satisfy the debtor eligibility requirements.
According to the bankruptcy court, intangible property rights may have more than one location. Indeed, the location of an intangible is “a legal fiction” and may vary depending on the purpose. For example, an intangible may be located (for certain purposes) where a debtor or its creditors are located, where the obligation was created or intended to be discharged, or anywhere the debtor can be found. Here, the court concluded that the attributes of the indenture (e.g., governed by New York law) supported a finding that Berau’s rights under the indenture were located in New York. Moreover, according to the court, New York law reflects “a legislative policy to permit contract counterparties to establish a contract situs in [New York] by designating New York governing law and a New York forum.” Thus, because the indenture contained a New York choice of law and New York forum selection clause, the contract rights arising from the Berau indenture were located in New York and, as such, satisfied the debtor-eligibility requirements.
Foreign Bank That Previously Had a U.S. Branch May Be Eligible for Chapter 15 Relief
Chapter 15 relief is not available to certain entities, including foreign banks that have a branch or agency in the United States. Recently, the Delaware District Court was faced with a bankruptcy filing by a foreign bank that had a branch in the United States prior to filing a Chapter 15 petition. In the case of In re The Irish Bank Resolution Corp. Ltd, 538 B.R. 692 (Bankr. D. Del. 2015), the bankruptcy court concluded that Chapter 15 relief was available to a foreign bank that did not have a branch or agency in the U.S. as of the date of the Chapter 15 filing notwithstanding that it previously had a branch in the U.S.
The facts of the Irish Bank Resolution case are relatively straightforward. Following the global financial crisis of 2008, the Irish government nationalized Anglo Irish Bank Corporation Ltd. and its assets were transferred to the Irish Bank Resolution Corporation Ltd. or “IBRC.” Pursuant to Irish law, special liquidators were appointed to liquidate IBRC. Thereafter, the liquidators filed a Chapter 15 petition for recognition of the Irish liquidation. The bankruptcy group granted recognition. A group of U.S. creditors, however, appealed the decision arguing that, among other things, IBRC was not eligible for Chapter 15 relief because it had a branch in the U.S. as recently as several months prior to the Chapter 15 filing. The district court denied the appeal finding that a debtor’s eligibility should be determined as of the Chapter 15 filing date and “not the debtor’s entire operational history.” Because there was no evidence that the debtor had a branch or agency in the U.S. as of the date of the Chapter 15 filing, the IBRC was eligible for Chapter 15 relief.
In decisions reached this past year, courts again interpreted the debtor eligibility requirements broadly and as only requiring some property, tangible or intangible, in the United States as of the date of the bankruptcy filing. Thus, according to at least one court, a contractual right located in the United States should suffice. Similarly, patent and other intellectual property may support a foreign debtor’s bankruptcy filing in the United States. Eligibility for bankruptcy relief, however, does not necessarily mean that a foreign debtor will ultimately obtain such relief in the United States. A bankruptcy court may exercise its discretion and abstain from hearing a bankruptcy case where another forum would be more appropriate.
Howard Seife is a partner in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group. Francisco Vazquez is counsel in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group.
Our aim is to help our clients understand the potential opportunities and challenges that COP25 may have on their business.
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