Foreign Debtors in Chapter 11

Last month's article concluded with 'Surviving a Motion to Dismiss or Suspend,' which discussed the exact boundaries of international comity, and explained that these boundaries 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. Facts that have weighed in favor of suspension or dismissal in recent years are as follows:

• The bulk of the debtor's assets and its operations are located abroad, so that the 'center of gravity' of the debtor's activities is deemed to be in the foreign jurisdiction (See e.g., In re Cenargo International, Plc., et al., case no. 03-10196 (RDD) (Bankr. S.D.N.Y. 2003));
• Most U.S. creditors supported the motion to dismiss or suspend the Chapter 11 case (See, e.g., Cenargo);
• The reorganization plan would not lead to a successful reorganization because the plan would not be given effect in the foreign debtor's jurisdiction and substantially all the debtor's assets are located in that jurisdiction (See, e.g., In re Spanish Cay Co., Ltd., 161 B.R. 715 (Bankr. S.D. Florida 1993));
• The foreign insolvency laws and the applicable U.S. provisions are similar (though they do not have to be identical in all respects) (See, e.g., Hopewell); and
• No reorganization plan has been filed, or the proposed reorganization plan does not appear to be viable (See, e.g., Spanish Cay).

Cenargo illustrates the application of these principles. The debtors were primarily engaged in the shipping business in the Irish Sea between England and Ireland; they had minimal assets located in the U.S. (ie, some pledged stock held by an indenture trustee and certain books and records). In January 2003, the debtors began Chapter 11 cases in the U.S. Shortly thereafter, without first seeking relief from the automatic stay, a creditor filed an action in the U.K. (the debtor's home jurisdiction) to begin administration proceedings. This development led the debtors to file a motion in the U.S. to enforce the automatic stay and seek sanctions against that creditor. The bankruptcy court for the Southern District of New York then lifted the automatic stay to allow the debtors to commence proceedings in the UK, and subsequently suspended the Chapter 11 case under section 305(a)(2) in deference to those proceedings. At a hearing in February 2003, Judge Robert D. Drain stated that the standard for suspension under section 305(a)(2) had been 'clearly met' and explained how the 304(c) factors had been satisfied. (With respect to section 304(c)(4) (ie, distribution of proceeds substantially in accordance with the order prescribed by the Bankruptcy Code), the court noted that such distribution does not have to be exactly like U.S. law and mentioned that U.K. insolvency proceedings and those in other common-law jurisdictions satisfy this test. See Transcript of February 14, 2003 Hearing ('Hrg. Trans.') at 73-76.) In discussing comity, the court pointed out that the 'center of gravity' in the case was clearly in the UK. Id. at 75: 13-14. Especially salient was the fact that none of the parties in interest had objected to the commencement of the U.K. proceedings; this fact weighed heavily in favor of according comity. Id. at 75-76.

In short, Cenargo shows that the minimum contacts required under section 109 to establish eligibility for Chapter 11 relief are not always sufficient to maintain the Chapter 11 case in a U.S. bankruptcy court once a foreign proceeding has been commenced in the debtor's home jurisdiction.