Foreign Debtors in Chapter 11

The Stick and Carrot Approach

Although some foreign courts have been willing to cooperate to a certain extent with U.S. bankruptcy courts, the general rule is that foreign jurisdictions will not recognize a U.S. bankruptcy case and the automatic stay. Nonetheless, there are at least two possible ways to protect the debtor's assets abroad, namely by offering 'stick and carrot' incentives. On the one hand, the debtor could threaten creditors with the 'stick' of sanctions in the U.S. for violating the automatic stay. On the other hand, the debtor could hold out the 'carrot' of a credible reorganization plan with a substantial pay-out to creditors.

The Carrot

Proposing a reorganization plan that attempts to preserve the debtor's going-concern value may be the best way to keep creditors from seizing assets abroad. It can be quite helpful if the debtor has a reorganization plan ready when it begins its Chapter 11 case, preferably with support from major creditors (ie, either a 'pre-packaged' or 'pre-arranged' bankruptcy filing). With this approach, the creditors can immediately review the plan's merits and viability. Using a pre-packaged or pre-arranged filing has an additional advantage: U.S. bankruptcy courts seem to be more inclined to deny a motion to dismiss under section 305(a)(2) if a reorganization plan has been filed with the support of at least one of the main creditors and appears to be viable. See Spanish Cay.

The Stick

Under sections 362 and 541(a) of the Bankruptcy Code, the automatic stay applies to the property of the debtor's estate 'wherever located and by whomever held' (emphasis added). Therefore, any actions by a creditor against the foreign debtor's assets 'even if located in the debtor's home jurisdiction 'would violate the automatic stay. Likewise, as seen in Cenargo, while a Chapter 11 case is pending, commencing an involuntary insolvency case in the jurisdiction of the foreign debtor without leave of the bankruptcy court may be considered a violation of the automatic stay.

However, the U.S. bankruptcy court could only impose sanctions for a violation of the automatic stay if it can assert personal jurisdiction over the violating creditor. If the foreign creditor has previously appeared in the Capter 11 case 'without jurisdictional reservation', the bankruptcy court may assert personal jurisdiction over that creditor, and automatic stay violations may be subject to sanctions by the bankruptcy court. See, e.g. Cenargo, Order to Show Cause dated January 28, 2003, at 2, and cases cited therein.

Note that a court may consider imposing sanctions not only against a creditor that violates the stay, but also against 'a firm and individuals who may become involved in actions that are in violation of the stay.' See Cenargo, Hrg. Trans. at 86: 7-9, where although the bankruptcy court suspended the Chapter 11 case pursuant to section 305(a)(2), it retained jurisdiction to adjudicate an alleged violation of the automatic stay by a creditor and as well as certain individuals. This aspect of Cenargo is currently pending in the bankruptcy court.

Conclusion

Finally, it should be noted that any sanctions imposed might prove to be unenforceable if the foreign creditor does not have any assets in the U.S. and the creditor's foreign jurisdiction does not recognize the U.S. contempt order. In that case, there will be no enforceable remedy against the foreign creditor or its assets.

Mark van Ophem and Marc Bennett are part of the Global Restructuring Group in the New York office of Allen & Overy. Phone: 212-610-6388 (van Ophem); 212-756-1106 (Bennett).

Part Two of a Two-Part Article

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.

The Stick and Carrot Approach

Although some foreign courts have been willing to cooperate to a certain extent with U.S. bankruptcy courts, the general rule is that foreign jurisdictions will not recognize a U.S. bankruptcy case and the automatic stay. Nonetheless, there are at least two possible ways to protect the debtor's assets abroad, namely by offering 'stick and carrot' incentives. On the one hand, the debtor could threaten creditors with the 'stick' of sanctions in the U.S. for violating the automatic stay. On the other hand, the debtor could hold out the 'carrot' of a credible reorganization plan with a substantial pay-out to creditors.

The Carrot

Proposing a reorganization plan that attempts to preserve the debtor's going-concern value may be the best way to keep creditors from seizing assets abroad. It can be quite helpful if the debtor has a reorganization plan ready when it begins its Chapter 11 case, preferably with support from major creditors (ie, either a 'pre-packaged' or 'pre-arranged' bankruptcy filing). With this approach, the creditors can immediately review the plan's merits and viability. Using a pre-packaged or pre-arranged filing has an additional advantage: U.S. bankruptcy courts seem to be more inclined to deny a motion to dismiss under section 305(a)(2) if a reorganization plan has been filed with the support of at least one of the main creditors and appears to be viable. See Spanish Cay.

The Stick

Under sections 362 and 541(a) of the Bankruptcy Code, the automatic stay applies to the property of the debtor's estate 'wherever located and by whomever held' (emphasis added). Therefore, any actions by a creditor against the foreign debtor's assets 'even if located in the debtor's home jurisdiction 'would violate the automatic stay. Likewise, as seen in Cenargo, while a Chapter 11 case is pending, commencing an involuntary insolvency case in the jurisdiction of the foreign debtor without leave of the bankruptcy court may be considered a violation of the automatic stay.

However, the U.S. bankruptcy court could only impose sanctions for a violation of the automatic stay if it can assert personal jurisdiction over the violating creditor. If the foreign creditor has previously appeared in the Capter 11 case 'without jurisdictional reservation', the bankruptcy court may assert personal jurisdiction over that creditor, and automatic stay violations may be subject to sanctions by the bankruptcy court. See, e.g. Cenargo, Order to Show Cause dated January 28, 2003, at 2, and cases cited therein.

Note that a court may consider imposing sanctions not only against a creditor that violates the stay, but also against 'a firm and individuals who may become involved in actions that are in violation of the stay.' See Cenargo, Hrg. Trans. at 86: 7-9, where although the bankruptcy court suspended the Chapter 11 case pursuant to section 305(a)(2), it retained jurisdiction to adjudicate an alleged violation of the automatic stay by a creditor and as well as certain individuals. This aspect of Cenargo is currently pending in the bankruptcy court.

Conclusion

Finally, it should be noted that any sanctions imposed might prove to be unenforceable if the foreign creditor does not have any assets in the U.S. and the creditor's foreign jurisdiction does not recognize the U.S. contempt order. In that case, there will be no enforceable remedy against the foreign creditor or its assets.

Mark van Ophem and Marc Bennett are part of the Global Restructuring Group in the New York office of Allen & Overy. Phone: 212-610-6388 (van Ophem); 212-756-1106 (Bennett).