Chapter 15 Petition Date 'Anchors' COMI Analysis

October 17, 2013, will mark the eighth anniversary of the enactment of chapter 15 of the U.S. Bankruptcy Code as part of the comprehensive U.S. bankruptcy-law reforms implemented in 2005. Chapter 15, which governs cross-border bankruptcy and insolvency cases, is patterned after the Model Law on Cross-Border Insolvency (the "Model Law"), a framework of legal principles formulated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997 to deal with the rapidly expanding volume of international insolvency cases. The Model Law has now been adopted in one form or another by 20 nations or territories.

The jurisprudence of chapter 15 has evolved since 2005, and one issue that has received considerable attention is the determination of a foreign debtor's "center of main interests" ("COMI"). In Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), No. 11-4376, 2013 BL 102426 (2d Cir. Apr. 16, 2013), the U.S. Court of Appeals for the Second Circuit recently ruled that COMI must be determined on the basis of the debtor's "activities at or around the time the Chapter 15 petition is filed," rather than on the commencement date of the foreign proceeding.

In making such an inquiry, the Second Circuit cautioned, "a court may consider the period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith." Factors that may be considered in determining COMI, the court explained, "are not limited and may include the debtor's liquidation activities."

Another important portion of the Second Circuit's decision was its analysis of the "public policy exception" to relief under chapter 15 contained in section 1506 of the Bankruptcy Code. The Second Circuit concluded that the exception is to be narrowly construed and that in the case of the foreign proceeding at issue in Fairfield Sentry, restricted access to documents in a British Virgin Islands liquidation proceeding "is no basis on which to hold that recognition of the BVI liquidation is manifestly contrary to U.S. public policy."

RECOGNITION UNDER CHAPTER 15

Under chapter 15, the "foreign representative" of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." "Foreign representative" is defined in section 101(24) of the Bankruptcy Code 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."

"Foreign proceeding" is defined by section 101(23) of the Bankruptcy Code 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.

Because more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the U.S. of both a "main" proceeding - a case pending in the country that contains the debtor's COMI - and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment."

Section 1517(b) of the Bankruptcy Code provides that a "foreign proceeding shall be recognized . . . as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests." The Bankruptcy Code does not define "COMI." However, section 1516(c) provides that, "[in] the absence of evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be" the debtor's COMI. According to the statute's legislative history, this presumption was included "for speed and convenience of proof where there is no serious controversy." See H.R. Rep. No. 109-31, pt. 1, at 112-13 (2005), U.S. Code Cong. & Admin. News2005, pp. 88, 175. An "establishment" is defined in section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."

The Bankruptcy Code does not specify what evidence is required to rebut the presumption that COMI is the debtor's place of registration or incorporation. Various factors have been deemed relevant by courts and commentators in examining...