* This article was first published by INSOL International on April 17, 2015.
Sovereign Assets Ltd. (SAL), a real estate firm based in Israel, was unable to service its debt obligations and was placed into liquidation proceedings in Israel. Two administrators, who had been appointed to liquidate the company in Israel, commenced Chapter 15 proceeding under the US Bankruptcy Code in the US Bankruptcy Court for the Southern District of New York. The Bankruptcy Court entered an order granting recognition of SAL’s liquidation proceeding in Israel under 11 U.S.C. § 1517(a)1 and allowed the administrators to pursue SAL’s assets in the United States.
The Bankruptcy Court’s decision is significant because it discusses, among other things, A) the Second Circuit’s test for determining the debtor’s center of its main interests (COMI) under 11 U.S.C. § 1502(4); B) the debtor’s eligibility requirements under 11 U.S.C. § 109(a); and C) the “collective” nature of Israeli liquidation proceedings under Israeli bankruptcy law that does not violate the public policy exception under 11 U.S.C. § 1506 and is consistent with the United States’ fundamental standards of fairness.
SAL is a public company operating under the laws of Israel. SAL is registered with, and is subject to the rules of, the Tel Aviv Stock Exchange (TASE). SAL’s primary business has been to invest in real estate located in the United States through other entities in the US that SAL owns in whole or in part.
On May 21, 2007, SAL raised 50 million Israeli shekels by selling bonds exclusively in Israel to acquire real estate in the United States. Aurora Fidelity Trust Company was appointed as the Indenture Trustee for the bondholders. The funds were used to acquire real property located in Milford, Connecticut and Nashville, Tennessee.
Beginning in 2007, Abraham Poznanski, who resides in New York, gained control of a majority of SAL’s shares and became its largest shareholder and chief executive officer. In connection with Mr. Poznanski’s ownership, control, and operation of SAL and its affiliates, Mr. Poznanski was accused of, among other things, alleged violations of his fiduciary duties. Several actions have been pending in both the New York Supreme Court and the Israeli District Court involving these and other allegations against Mr. Poznanski.
On March 5, 2014, SAL issued its financial status report stating that SAL was unable to service its obligations. On March 17, 2014, a bondholder, Edwin Cohen, and the Indenture Trustee for the bondholders filed a petition with the District Court, Tel Aviv, Israel, Case No. 31623-03-14 (the Israeli Court) to order the liquidation of SAL (Israeli Liquidation Proceeding). On March 24, 2014, without an objection to the petition, the Israeli Court issued a provisional liquidation order and appointed Adv. Guy Gissin and Adv. Rami Kogan as provisional liquidators of SAL. On July 7, 2014, the Israeli Court issued an order appointing Advs. Gissin and Kogan as SAL’s administrators for the purpose of liquidating SAL under Israeli Companies Law 5759-1999 (New Version), and the Israeli Companies Ordinance (Consolidated Version) 5743-1983.2
SAL’s Chapter 15 Case
On October 31, 2014, a verified petition, accompanied by two declarations, was filed by Advs. Gissin and Kogan (the Petitioners) in their capacity as special administrators of SAL in the US Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). The Petitioners sought recognition of Israeli Liquidation Proceeding as a foreign main proceeding or a foreign non-main proceeding under Chapter 15 of Title 11 of the United States Code (the Bankruptcy Code) in order to, among other things, investigate the status and disposition of SAL’s assets located in the United States.
On October 31, 2014, the Petitioners also filed an ex parte motion for a preliminary injunction seeking to prevent any person or entity from taking actions or continuing litigation with respect to the US non-debtor subsidiaries of SAL. After a hearing held on October 31, 2014, the Bankruptcy Court entered an order to show cause with a temporary restraining order (TRO), preventing all persons and entities from interfering with the Petitioners’ administration of Israeli Liquidation Proceeding. The Bankruptcy Court also scheduled a hearing on the motion for a preliminary injunction for November 20, 2014.
The Bankruptcy Court continued its TRO (by consent and by order dated November 17, 2014) to December 3, 2014, which was set as the date for the hearing on both the petition for recognition and the rescheduled motion for a preliminary injunction. The TRO was further continued, by consent, until December 4, 2014.
On November 20, 2014, objections to the petition for recognition and to the entry of a preliminary injunction were filed by, among others, 1) Abraham Poznanski, along with Mr. Poznanski’s affidavit in support of his objection; and 2) a group of state court plaintiffs self described as the “Nashville Plaintiffs,” together with the declaration of Mr. Lawrence Rosenstock.
On December 1, 2014, the Petitioners filed their reply memorandum of law, together with the reply declaration of Mr. Gissin, in support of their petition for recognition and in reply to all objections filed. On December 3, 2014, the Bankruptcy Court held a status conference and the parties commenced a limited portion of the recognition hearing. On December 4, 2014, the Bankruptcy Court heard extensive oral argument and issued an oral decision from the bench.
Bankruptcy Court’s Decision
On December 4, 2014, the Bankruptcy Court heard extensive oral argument and issued an oral decision granting, among other things, recognition of SAL’s liquidation proceeding in Israel as a foreign main proceeding under 11 U.S.C. § 1517(b)(1) and entrusting the administration of SAL’s assets within the territorial jurisdiction of the United States to the Petitioners as the exclusive authorized foreign representatives.
COMI Requirement under 11 U.S.C. § 1502(4)
In his objection to the petition for recognition, Mr. Poznanski agued, among other things, that petition for recognition should be denied because the requirements of Section 1517 of the Bankruptcy Code have not been met (i.e., for recognition as the foreign main proceeding, the debtor’s foreign proceeding must be pending in the country where the debtor has the COMI.
With respect to the COMI requirement, Mr. Poznanski argued that SAL is a shell company, which has no ongoing business in Israel, other than being formed in Israel and once issuing bonds to raise money there. Mr. Poznanski also argued that when SAL’s Israeli liquidation proceeding was commenced, SAL had no employees in Israel and its office in Israel was subsequently transferred to the offices of Mr. Gissin, one of the Petitioners. Further, Mr. Poznanski argued that all of SAL’s assets are located in the United States, including its officers, subsidiaries, real estate, and managers and, as a result, Mr. Poznanski asserted that Israel cannot be SAL’s COMI.
The Bankruptcy Court disagreed with Mr. Poznanski and found that SAL’s Israeli liquidation proceeding is a foreign main proceeding within the meaning of Section 1502(4) of the Bankruptcy Code. Specifically, the Bankruptcy Court found that SAL’s COMI has been located in Israel at all relevant times. SAL was organized under the laws of Israel. It is a public company listed with the TASE and is subject to TASE’s rules. SAL’s office and exclusive place of raising funds were located in Israel. SAL was managed and operated in Israel before its liquidation. Many of SAL’s known creditors are located in Israel. SAL is now operated under the Israeli Liquidation Proceeding.
Moreover, relying on its prior decision in In re Suntech Power Holdings Company Ltd.,3 the Bankruptcy Court concluded that even if SAL had no functioning office in Israel as of the commencement of its liquidation proceeding, courts have held that the sites of the debtor’s liquidation activities may alone be considered as part of the COMI analysis. In this case, the Bankruptcy Court found, and no one disputed, that the Petitioners have been operating SAL’s liquidation activities in Israel, including conducting interviews of SAL’s former employees and board members searching for assets and opening a bank account, and therefore satisfied the COMI requirement under Section 1502(4) of the Bankruptcy Code.
SAL’s Israeli Liquidation Proceeding Is “Collective” in Nature, Consistent with the US Public Policy, and Meets the Eligibility Requirements under 11 U.S.C. § 109(a)
Mr. Poznanski also argued that the Petitioners have not demonstrated that SAL’s Israeli Liquidation Proceeding is “collective” in nature and thus it does not qualify as a foreign proceeding. Moreover, Mr. Poznanski argued that recognition of the Israeli Liquidation Proceeding as a foreign proceeding would be manifestly inconsistent with the US public policy and therefore cannot be permitted under Section 1506 of the Bankruptcy Code. In addition, the Nashville Plaintiffs argued that SAL cannot satisfy the eligibility requirements of Section 109(a) of the Bankruptcy Code, which limits who may be a debtor under the Bankruptcy Code to a person that resides or has a domicile, a place of business, or property in the United States.
SAL’s Israeli Liquidation Proceeding is “Collective” in Nature
The Bankruptcy Court disagreed with the arguments set forth by Mr. Poznanski and the Nashville Plaintiffs. According to the Bankruptcy Court, SAL’s Israeli Liquidation Proceeding is a “collective proceeding” that was commenced by an indenture trustee on behalf of all bondholders and other creditors of SAL. Indeed, SAL’s Israeli Liquidation Proceeding is described in the Petitioners’ verified petition as a proceeding for “collecting and liquidating of SAL’s assets and to pay claims of creditors pursuant to the rules of Israeli law.”4
Israeli Bankruptcy Law Meets the United States’ Fundamental Standards of Fairness and SAL’s Israeli Liquidation Proceeding Does Not Violate the Public Policy Exception under 11 U.S.C. § 1506
The Bankruptcy Court also concluded that Israeli Bankruptcy Law meets the United States’ fundamental standards of fairness. According to the Bankruptcy Court, SAL’s Israeli Liquidation Proceeding “accords with the course of civilized jurisprudence”5 and does not trigger the public policy exception under Section 1506 of the Bankruptcy Code. The Bankruptcy Court stated that all relief under Chapter 15 is subject to the limits in Section 1506 of the Bankruptcy Code. However, the public policy exception is drafted in narrow terms and the key determination under Section 1506 is “whether the procedures used in the foreign jurisdiction meet our fundamental standards of fairness.”6
The Bankruptcy Court found that the Petitioners provided public notice of the commencement of the SAL’s liquidation proceeding and the opportunity to object before the hearing in Israel. The Bankruptcy Court also found that Mr. Poznanski filed no objection to the Israeli Liquidation Proceeding in Israel either to the liquidation petition or to the appointment of the Petitioners, and the Bankruptcy Court would not permit Mr. Poznanski to attempt to collaterally attack the Israeli Court’s orders. The Bankruptcy Court concluded that Mr. Poznanski and all parties in interest in the Chapter 15 case enjoy full due process rights to complain about the ongoing conduct of the proceedings, if they so desire and, as a result, the public policy exception under Section 1506 of the Bankruptcy Code does not provide a basis for denial of recognition of SAL’s Israeli Liquidation Proceeding.
SAL’s Israeli Liquidation Proceeding Meets the Eligibility Requirements under 11 U.S.C. § 109(a)
The Bankruptcy Court also found that the Petitioners satisfied the eligibility requirements under Section 109(a) of the Bankruptcy Code. Specifically, the Bankruptcy Court found that the Petitioners showed that SAL has property in the United States in the form of shares in its US subsidiaries, at least one of which is a Delaware corporation. Under Delaware law, the location of ownership of the capital stock of Delaware corporations is regarded as being in Delaware, regardless of where the certificates or the owner are located. Accordingly, the equity in SAL’s US subsidiaries may be considered property of SAL in the United States, meeting the requirements under Section 109(a). In addition, the Bankruptcy Court pointed out that SAL’s potential causes of action against Mr. Poznanski and others, which may be asserted in the United States in the future, may constitute property for purposes of Section 109 under its prior decision in In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 369-70 (Bankr. S.D.N.Y. 2014).
The Bankruptcy Court’s decision in In re Sovereign Assets Ltd., Case No. 14-13009 (Bankr. S.D.N.Y. December 17, 2014) (Chapman, J) is significant for several reasons. First, Judge Shelley Chapman clarified and explained the Second Circuit’s recently developed test for determining a debtor’s COMI, concluding that SAL’s liquidation activities in Israel alone may be sufficient to satisfy the COMI requirement under Section 1502(4) of the Bankruptcy Code. Second, Judge Chapman recognized SAL’s Israeli Liquidation Proceeding, expressly finding that Israeli Bankruptcy Law meets the United States’ fundamental standards of fairness and that SAL’s Israeli Liquidation Proceeding does not violate the public policy exception under 11 U.S.C. § 1506. Finally, Judge Chapman concluded that SAL meets the debtor’s eligibility requirements, finding that under applicable Delaware law, SAL’s property in the form of its shares in its US subsidiaries (e.g., a Delaware corporation) is a property in the United States, and SAL thus may be a debtor under 11 U.S.C. § 109(a).