United States: Bad Faith Is Not A Bar To Chapter 15 Recognition Of Foreign Proceeding, Says Southern District Of New York Bankruptcy Court

Bad Faith Is Not a Bar to Chapter 15 Recognition of Foreign Proceeding, Says Southern District of New York Bankruptcy Court¹

Synopsis

In Culligan Ltd.,² the U.S. Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court') held that bad faith is not a bar to recognition of a foreign proceeding under chapter 15 of the U.S. Bankruptcy Code (the 'Bankruptcy Code')³ where the debtor filed chapter 15 solely as a litigation tactic to stay pending litigation in New York state court. In reaching its decision, the Bankruptcy Court explained that, unlike in chapter 11 cases, there is no good faith filing requirement under chapter 15 of the Bankruptcy Code. Rather, recognition of a foreign proceeding under chapter 15 is subject to the requirements set forth in section 1517(a) of the Bankruptcy Code as limited by the public policy exception contained in section 1506 of the Bankruptcy Code. The public policy exception is narrow and is to be invoked only in extraordinary circumstances. The chapter 15 filing by the debtor in the Culligan case, though a litigation tactic, was not such an extraordinary circumstance, according to the Bankruptcy Court. Accordingly, as all the requirements for recognition of the foreign proceeding had been met, the Bankruptcy Court granted recognition of the proceeding.

I. Background

A. Requirements for recognition of foreign proceeding under chapter 15

The United Nations Commission on International Trade promulgated the Model Law on Cross-Border Insolvency (the 'Model Law') in 1997. The Model Law consists of procedural rules for enacting countries to follow in cross-border insolvency cases.⁴ The United States incorporated the Model Law into federal statute via chapter 15 of the Bankruptcy Code in 2005. Among other things, chapter 15 is designed to streamline the process of recognition of a foreign insolvency or restructuring proceeding in the United States.

To that end, section 1517(a) of chapter 15 of the Bankruptcy Code provides that a bankruptcy court shall enter an order recognising a foreign proceeding if certain requirements are met. Specifically, section 1517(a) of the Bankruptcy Code provides that, subject to section 1506 of the Bankruptcy Code (discussed below), after notice and a hearing, an order recognising a foreign proceeding shall be entered if –

(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;

(2) the foreign representative applying for recognition is a person or body; and

(3) the petition meets the requirements of section 1515.⁵

Inherent in section 1517(a) and (b) are the requirements that 'the foreign proceeding and the foreign representative must meet the definitional requirements set out in sections 101(23) and 101(24) [of the Bankruptcy Code].'⁶ Section 101(23) defines a foreign proceeding as 'a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.'⁷ A foreign main proceeding is 'a foreign proceeding pending in the country where the debtor has the center of its main interests,'⁸ and a foreign nonmain proceeding is 'a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.'⁹ Section 101(24) defines a 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.'¹⁰

Section 1515 of the Bankruptcy Code and rule 1007(a)(4) of the Federal Rules of Bankruptcy Procedure (the 'Bankruptcy Rules') identify the documents that a debtor must file in support of a chapter 15 petition. ¹¹ Under section 1515 of the Bankruptcy Code, a foreign representative may apply for recognition of a foreign proceeding by filing a petition, and such petition must be accompanied by –

(1) a certified copy of the decision commencing such foreign proceeding and appointing the foreign representative;

(2) a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or

(3) in the absence of evidence referred to in paragraphs (1) and (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative.¹²

Section 1515 also provides that '[a] petition for recognition shall also be accompanied by a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative.'¹³ Bankruptcy Rule 1007(a)(4) requires that '[i]n addition to the documents required under §1515 of the Code, a foreign representative filing a petition for recognition under chapter 15 shall file with the petition:

(A) a corporate ownership statement containing the information described in Rule 7007.1; and (B) unless the court orders otherwise, a list containing the names and addresses of all persons or bodies authorized to administer foreign proceedings of the debtor, all parties to litigation pending in the United States in which the debtor is a party at the time of the filing of the petition, and all entities against whom provisional relief is being sought under §1519 of the Code.'¹⁴

The Second Circuit Court of Appeals has held that a chapter 15 debtor must also meet the requirements section 109(a) of the Bankruptcy Code,¹⁵ which provides that 'only a person that resides or has a domicile, a place of business, or property in the United States ...' may be a debtor under the Bankruptcy Code.¹⁶ However, '[u]ndrawn attorney retainers satisfy the 'property in the United States' eligibility requirement of section 109(a) of the Bankruptcy Code.'¹⁷

Thus, in order to qualify for relief under chapter 15, a debtor must meet '(a) the general eligibility requirements under section 109(a) of the Bankruptcy Code, and (b) the more specific eligibility requirements under section 1517(a) of the Bankruptcy Code; and the chapter 15 petition for recognition must meet the requirements of section 1515 of the Bankruptcy Code and Bankruptcy Rule 1007(a)(4).'¹⁸

B. Public policy exception of section 1506 of the Bankruptcy Code

Even if a debtor meets all the requirements for relief under chapter 15, section 1506 of the Bankruptcy Code subjects a debtor's right to recognition to a narrow public policy exception. Section 1506 provides '[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.'¹⁹ 'Unless barred by the public policy exception, courts will grant recognition to foreign proceedings that meet the requirements of section 1517(a) of the Bankruptcy Code.'²⁰

Footnotes

1 The views expressed herein are solely those of Maja Zerjal Fink and Ginger Clements and not necessarily the views of Arnold & Porter Kaye

Scholer LLP or any of its attorneys.

2 In re Culligan Ltd., No. 20-12192 (JLG), 2021 WL 2787926 (Bankr. S.D.N.Y. July 2, 2021).

3 11 U.S.C. §§ 101, et al.

4 U.N. Comm'n on Int'l Trade Law, UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation, at 19, 25,

U.N. Sales No. E.14.V.2 (2014).

5 § 1517(a).

6 See In re U.S. Steel Canada Inc., 571 B.R. 600, 608 (Bankr. S.D.N.Y. 2017) (internal quotations omitted).

7 § 101(23).

8 11 U.S.C. § 1502(4).

9 § 1502(5). Establishment means 'any place of operations where the debtor carries out a nontransitory economic activity.' § 1502(2).

10 § 101(24).

11 See § 1515; Fed. R. Bankr. P. 1007(a)(4).

12 § 1515(a)–(b).

13 11 U.S.C. § 1515(c).

14 Fed. R. Bankr. P. 1007(a)(4).

15 See In re Barnet, 737 F.3d 238, 241 (2d Cir. 2013).

16 § 109(a).

17 In re Culligan Ltd., No. 20-12192 (JLG), 2021 WL 2787926, at *9 (Bankr. S.D.N.Y. July 2, 2021) (citing In re Octaviar Admin. Pty Ltd., 511 B.R.

361, 373–374 (Bankr. S.D.N.Y. 2014) (finding that the foreign debtor 'ha[d] property in the United States in the form of an undrawn retainer

in the possession of the Foreign Representatives' counsel.'); In re U.S. Steel Canada Inc., 571 B.R. 600, 610 (Bankr. S.D.N.Y. 2017) (foreign

debtor had property in the United States including 'an undrawn $100,000 retainer paid to its U.S. counsel and held in a JP Morgan Chase

Bank account located in New York, NY.').

18 Culligan, 2021 WL 2787926, at *7.

19 11 U.S.C. § 1516.

20 Culligan, 2021 WL 2787926, at *6.

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