This Land Is Your Land: Foreign Debtors in Chapter 11

In addition, many foreign jurisdictions lack the concept of a 'debtor in possession.' Instead, they provide that the debtor loses the power to manage its own affairs once the insolvency proceeding has started. Moreover, the automatic stay provisions of the Bankruptcy Code serve to protect the debtor's assets and to give the debtor's management a breathing space to file a reorganization plan; and during the initial months of the case, the debtor has the exclusive right to file a plan and solicit acceptances thereto. Finally, U.S. bankruptcy law provides for a relatively generous discharge of the debtor's obligations upon the confirmation of the reorganization plan.

But regardless of how attractive Chapter 11 may be, non-U.S. debtors typically face certain obstacles on the road to a successful Chapter 11 reorganization. For instance, a foreign debtor has to establish that it is eligible for relief under Chapter 11. A non-U.S. debtor may also be forced to fend off a motion to dismiss or suspend the Chapter 11 case (or to abstain from further proceedings) pursuant to section 305(a)(2). Section 305(a)(1), which provides that a Chapter 11 case may be dismissed or suspended if the interests of the creditor and the debtor would be better served by dismissal, could also pose a danger to the foreign debtor's Chapter 11 case. However, dismissal under section 305(a)(1) in the absence of a pending foreign insolvency case could create a vacuum in which creditors could seize assets in the U.S. and abroad; most courts would probably not look favorably upon such an outcome. Finally, a foreign debtor may need to take steps to protect its assets against collateral (in both senses of the word) attacks by creditors outside the U.S.

You Too Can Be a Debtor

Under sections 109(a) and (d) of the Bankruptcy Code, an entity is eligible for relief if it 'resides or has a domicile, a place of business, or property in the United States.' Under the relevant case law, it is not difficult for a non-U.S. entity to establish eligibility to become a debtor. For example, an entity that maintains an employee or has retained an independent contractor, who engages in substantial activities in the U.S. on its behalf, has 'a place of business' within the meaning of section 109(a). In re Brierley, 145 B.R. 151, 161-62 (Bankr. S.D.N.Y. 1992). In addition, it should be easy to establish eligibility on the basis of having 'property in the United States'. In fact, according to Collier, there is 'virtually no formal barrier to a foreign entity commencing a case under title 11 in the United States' 4 Collier on Bankruptcy ' 502.03[7][f] (15th ed. rev. 2002). (Emphasis added.)

Specifically, courts have held that a foreign person whose only nexus to the U.S. was a securities clearing account or a bank account was eligible to be a debtor under section 109, regardless of the amount in the account. See, eg, Bank of America, N.T. & S.A. v. World of English, N.V., 23 B.R. 1015 (N.D. Ga. 1982) (bank account); In re Axona Int'l Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D.N.Y. 1988) (clearing account). Likewise, the court in In re Board of Directors of Hopewell Int'l Ins. Ltd., 238 B.R. 25 (Bankr. S.D.N.Y. 1999), held that venue of an ancillary proceeding under section 1410(c) of the Bankruptcy Code was proper in New York because the petitioner had its principal U.S. assets in New York. Hopewell also supports the proposition that the location of an account receivable in the United States is sufficient to render a non-U.S. corporation eligible to become a debtor under the Bankruptcy Code. In addition, it has been held that claims of foreign subsidiaries to funds held by their parent in a U.S. bank account are 'property in the U.S.' However, a mere (inchoate) claim against property is not sufficient. In re Head, 223 B.R. 648 (Bankr. W.D.N.Y. 1998). In In re Global Ocean Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 2000), the court found that foreign persons' ownership of stock in a U.S. corporation would qualify as 'property in the U.S.' under section 109. In addition, the court held that interests in the unearned portion of retainers paid to their U.S. lawyers constituted 'property in the United States' that rendered these foreign persons eligible to be debtors under section 109.

However, a bankruptcy court may dismiss a Chapter 11 case if it has been filed in bad faith. If a debtor moved assets to the U.S. immediately before filing the petition, or if assets were taken out of the U.S. and only a nominal amount was left to create eligibility under section 109, a court may interpret these acts as evidence of bad faith. See, eg, In re McTague, 198 B.R. 428, 432-33 (Bankr. W.D.N.Y. 1996).

Surviving A Motion to Dismiss or Suspend

Although it is ordinarily not difficult to establish a foreign debtor's eligibility to become a debtor under the Bankruptcy Code, it is harder to prevent dismissal of a Chapter 11 case if the debtor's connections to the United States are minimal. Section 305(a)(2) of the Bankruptcy Code provides that Chapter 11 cases may be dismissed or suspended if (a) there is pending a foreign proceeding, and (b) the factors in section 304(c) warrant such dismissal or suspension. The section 304(c) criteria include, among other things, just treatment of all creditors, protection of U.S. creditors against prejudice and inconvenience in the foreign proceeding, prevention of preferential or fraudulent disposal of estate property, distribution of estate proceeds 'substantially in accordance with the order' prescribed by the Bankruptcy Code, and comity.

Courts have held that the 304(c) criteria are 'designed to give the Court maximum flexibility.' In re Ionica, 241 B.R. 829, 834 (Bankr. S.D.N.Y. 1999). Although the principle of international comity is generally held not to be decisive, most courts nonetheless seem to focus on this factor. The Supreme Court long ago defined comity as '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, 163-64 (1895). In practice, comity considerations require a court to examine whether the law under which the foreign proceeding is being conducted is procedurally fair and otherwise consistent with the policies of applicable U.S. law. In re Hourani, 180 B.R. 58 (Bankr. S.D.N.Y. 1995). However, the exact boundaries of international comity are not clear. Therefore, a court's decision on a motion to dismiss or suspend a non-U.S. debtor's bankruptcy case under section 305(a)(2) (which invokes the 304(c) factors) will depend heavily on the case's specific facts.

Next month's conclusion of this article discusses the 'stick and carrot approach' and looks briefly at the proposed Chapter 15 bankruptcy code.

Mark van Ophem and Marc Bennett are part of the Global Restructuring Group in the New York office of Allen & Overy.

In the past few years, foreign debtors such as the Singer Company N.V. (a Netherlands Antilles corporation), Global Telesystems Europe B.V. (a Dutch corporation), Cenargo Inter- national Plc. (a British corporation), Versatel Telecom International N.V., and United Pan-Europe Communications N.V. (both Dutch corporations) have filed voluntary Chapter 11 petitions in the United States. Some of these debtors were large multinationals with assets in many jurisdictions, including the U.S., but other foreign debtors in Chapter 11 have had only minimal assets in the U.S. What special considerations arise when a non-U.S. debtor with only limited assets in the U.S. files a Chapter 11 petition?

The Lure of Chapter 11

From a non-U.S. perspective, a Chapter 11 case is generally perceived as debtor-friendly and often offers a foreign debtor important advantages over the insolvency proceedings of its local jurisdiction. For example, Chapter 11 is specifically designed to achieve a reorganization of the debtor, whereas foreign insolvency proceedings are often focused on the liquidation of the debtor for the benefit of the creditors. Likewise, the strategic use of a Chapter 11 case by a debtor to, among other things, ach- ieve a debt restructuring and to reject unwanted leases and contracts is perfectly acceptable in the U.S. In most foreign jurisdictions, however, filing for bankruptcy is more stigmatizing and usually considered only as a last resort.

In addition, many foreign jurisdictions lack the concept of a 'debtor in possession.' Instead, they provide that the debtor loses the power to manage its own affairs once the insolvency proceeding has started. Moreover, the automatic stay provisions of the Bankruptcy Code serve to protect the debtor's assets and to give the debtor's management a breathing space to file a reorganization plan; and during the initial months of the case, the debtor has the exclusive right to file a plan and solicit acceptances thereto. Finally, U.S. bankruptcy law provides for a relatively generous discharge of the debtor's obligations upon the confirmation of the reorganization plan.

But regardless of how attractive Chapter 11 may be, non-U.S. debtors typically face certain obstacles on the road to a successful Chapter 11 reorganization. For instance, a foreign debtor has to establish that it is eligible for relief under Chapter 11. A non-U.S. debtor may also be forced to fend off a motion to dismiss or suspend the Chapter 11 case (or to abstain from further proceedings) pursuant to section 305(a)(2). Section 305(a)(1), which provides that a Chapter 11 case may be dismissed or suspended if the interests of the creditor and the debtor would be better served by dismissal, could also pose a danger to the foreign debtor's Chapter 11 case. However, dismissal under section 305(a)(1) in the absence of a pending foreign insolvency case could create a vacuum in which creditors could seize assets in the U.S. and abroad; most courts would probably not look favorably upon such an outcome. Finally, a foreign debtor may need to take steps to protect its assets against collateral (in both senses of the word) attacks by creditors outside the U.S.

You Too Can Be a Debtor

Under sections 109(a) and (d) of the Bankruptcy Code, an entity is eligible for relief if it 'resides or has a domicile, a place of business, or property in the United States.' Under the relevant case law, it is not difficult for a non-U.S. entity to establish eligibility to become a debtor. For example, an entity that maintains an employee or has retained an independent contractor, who engages in substantial activities in the U.S. on its behalf, has 'a place of business' within the meaning of section 109(a). In re Brierley, 145 B.R. 151, 161-62 (Bankr. S.D.N.Y. 1992). In addition, it should be easy to establish eligibility on the basis of having 'property in the United States'. In fact, according to Collier, there is 'virtually no formal barrier to a foreign entity commencing a case under title 11 in the United States' 4 Collier on Bankruptcy ' 502.03[7][f] (15th ed. rev. 2002). (Emphasis added.)

Specifically, courts have held that a foreign person whose only nexus to the U.S. was a securities clearing account or a bank account was eligible to be a debtor under section 109, regardless of the amount in the account. See, eg, Bank of America, N.T. & S.A. v. World of English, N.V. , 23 B.R. 1015 (N.D. Ga. 1982) (bank account); In re Axona Int'l Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D.N.Y. 1988) (clearing account). Likewise, the court in In re Board of Directors of Hopewell Int'l Ins. Ltd., 238 B.R. 25 (Bankr. S.D.N.Y. 1999), held that venue of an ancillary proceeding under section 1410(c) of the Bankruptcy Code was proper in New York because the petitioner had its principal U.S. assets in New York. Hopewell also supports the proposition that the location of an account receivable in the United States is sufficient to render a non-U.S. corporation eligible to become a debtor under the Bankruptcy Code. In addition, it has been held that claims of foreign subsidiaries to funds held by their parent in a U.S. bank account are 'property in the U.S.' However, a mere (inchoate) claim against property is not sufficient. In re Head, 223 B.R. 648 (Bankr. W.D.N.Y. 1998). In In re Global Ocean Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 2000), the court found that foreign persons' ownership of stock in a U.S. corporation would qualify as 'property in the U.S.' under section 109. In addition, the court held that interests in the unearned portion of retainers paid to their U.S. lawyers constituted 'property in the United States' that rendered these foreign persons eligible to be debtors under section 109.

However, a bankruptcy court may dismiss a Chapter 11 case if it has been filed in bad faith. If a debtor moved assets to the U.S. immediately before filing the petition, or if assets were taken out of the U.S. and only a nominal amount was left to create eligibility under section 109, a court may interpret these acts as evidence of bad faith. See, eg, In re McTague, 198 B.R. 428, 432-33 (Bankr. W.D.N.Y. 1996).

Surviving A Motion to Dismiss or Suspend

Although it is ordinarily not difficult to establish a foreign debtor's eligibility to become a debtor under the Bankruptcy Code, it is harder to prevent dismissal of a Chapter 11 case if the debtor's connections to the United States are minimal. Section 305(a)(2) of the Bankruptcy Code provides that Chapter 11 cases may be dismissed or suspended if (a) there is pending a foreign proceeding, and (b) the factors in section 304(c) warrant such dismissal or suspension. The section 304(c) criteria include, among other things, just treatment of all creditors, protection of U.S. creditors against prejudice and inconvenience in the foreign proceeding, prevention of preferential or fraudulent disposal of estate property, distribution of estate proceeds 'substantially in accordance with the order' prescribed by the Bankruptcy Code, and comity.

Courts have held that the 304(c) criteria are 'designed to give the Court maximum flexibility.' In re Ionica, 241 B.R. 829, 834 (Bankr. S.D.N.Y. 1999). Although the principle of international comity is generally held not to be decisive, most courts nonetheless seem to focus on this factor. The Supreme Court long ago defined comity as '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, 163-64 (1895). In practice, comity considerations require a court to examine whether the law under which the foreign proceeding is being conducted is procedurally fair and otherwise consistent with the policies of applicable U.S. law. In re Hourani, 180 B.R. 58 (Bankr. S.D.N.Y. 1995). However, the exact boundaries of international comity are not clear. Therefore, a court's decision on a motion to dismiss or suspend a non-U.S. debtor's bankruptcy case under section 305(a)(2) (which invokes the 304(c) factors) will depend heavily on the case's specific facts.

Next month's conclusion of this article discusses the 'stick and carrot approach' and looks briefly at the proposed Chapter 15 bankruptcy code.

Mark van Ophem and Marc Bennett are part of the Global Restructuring Group in the New York office of Allen & Overy.