As discussed in a prior blog entry, virtually any amount of property in the United States will enable most foreign entities to commence a case under chapter 11 of the Bankruptcy Code.  But once that case is opened, there are a number of challenges that parties may raise to keeping the case in a U.S. court.  As we summarize these potential challenges below, it is worth noting that some of these challenges implicate the fundamental benefits or weaknesses to restructuring a foreign enterprise under chapter 11 of the Bankruptcy Code, as compared with the laws of another jurisdiction. 

  • The court may dismiss the case under section 305(a)(1) of the Bankruptcy Code if “the interests of creditors and the debtor would be better served by such dismissal or suspension” (emphasis added). The test is conjunctive, so it is rare for a voluntary case to be dismissed on these grounds; courts are generally content to accept that the debtor that has voluntarily filed a case under the Bankruptcy Code has determined that it is in its own best interest to do so.
  • The court also may dismiss the case under section 305(a)(2) if a petition under chapter 15 of the Bankruptcy Code has been granted, and “the purposes of chapter 15…would be best served” by dismissal. Dismissal on these grounds typically will be sought by the “foreign representative” of the company, e., a trustee, receiver, liquidator, or similar office-holder who has been appointed by a non-U.S. court (usually the court in the company’s domicile or principal place of business) to displace management and administer the assets of the company.  (This is one reason why, when planning any international restructuring, it is critical at the outset for management to consider the possibility that such an officer-holder could be appointed, and to plan accordingly.)
  • “Bad faith” could form another basis for dismissal. Although there is no provision in the Bankruptcy Code for it, courts have dismissed chapter 11 cases on the grounds that they were filed with no reasonable prospect for reorganization and merely with the intent to delay creditors.
  • Similarly, in chapter 11 cases only, the Bankruptcy Court may dismiss a case under section 1112(b) “for cause.” The Bankruptcy Code does not provide a definition for “cause” as used in this subsection, but it does provide a list of examples.  These include the “inability to effectuate substantial consummation of a confirmed plan.”  “Substantial consummation,” a defined term under section 1101(2) of the Bankruptcy Code, encompasses the ability to effectuate a chapter 11 plan.

Thus, even if a foreign debtor passes the 109(a) test and can demonstrate that it filed its chapter 11 case in good faith, a court may still dismiss its case if it finds that in practical terms, a chapter 11 plan could never be effectuated or enforced on the debtor’s creditors.

A famous example of this is the chapter 11 case of Yukos Oil Company.  Yukos was an open stock company organized under the laws of the Russian Federation that operated a petroleum and energy business.  It was a massive company.  Indeed, according to theYukos court, when Yukos filed in 2005, its case was the largest case ever filed in the United States.  The court also found that the company’s assets “are massive relative to the Russian economy” and noted that because the company’s assets “are primarily oil and gas in the ground,” they are “literally a part of the Russian land.”

One of Yukos’s banks sought to dismiss the case on several grounds, including forum non conveniens, comity, and the Act of State Doctrine, none of which the bankruptcy court found applicable to dismissal of a voluntary chapter 11 case.  The court also was satisfied that Yukos qualified to be debtor under the Bankruptcy Code because the day before the filing, it transferred $480,000 to a bank account in Houston.

But the court nonetheless dismissed the case under section 1112(b) because it concluded that Yukos could not effectuate a chapter 11 plan given its circumstances:

Yukos filed for Chapter 11 relief stating an intention to reorganize.  However, the reorganization contemplated in Yukos’ plan is not a financial reorganization.  Indeed, since most of Yukos’ assets are oil and gas within Russia, its ability to effectuate a reorganization without the cooperation of the Russian government is extremely limited.

The take-away? It is certainly important to meet the basic requirements of section 109(a).  But it is much more important to focus on the practical questions: where are the debtor’s creditors?  What other parties need to be bound by a chapter 11 plan?  Whose participation is critical to the reorganization?  Are these parties within the reach of a U.S. court?  Can foreign creditors commence insolvency proceedings against the debtor in other jurisdictions?  What does the debtor need to do to protect assets in foreign jurisdictions?  Will it be necessary, and possible, to obtain cooperation from any foreign courts?  These questions, among others, are important for predicting the risk of a U.S. court dismissing the case for “cause” or “bad faith.”  But more importantly, it is the practical questions that matter most when considering whether chapter 11 presents a viable restructuring alternative for a foreign enterprise.