Recently, Japanese bulk-shipping company Daiichi Chuo Kisen Kaisha sought bankruptcy protection in both Tokyo and New York. The company, which features a fleet of 185 vessels used primarily to transport cargo such as limestone, cement and coal overseas, commenced its United States bankruptcy proceedings by filing a Chapter 15 petition in the United States Bankruptcy Court for the Southern District of New York. While many trade creditors and other parties-in-interest may be accustomed to Chapter 7 and Chapter 11 liquidations and reorganizations, a Chapter 15 may be a foreign concept (pun intended).
A Chapter 15 bankruptcy proceeding is intended to protect and maximize the value of a foreign debtor’s assets located in the United States while the debtor is engaged in a foreign insolvency proceeding. Absent this cross- border mechanism, a foreign debtor’s U.S.- based assets would not be protected by the automatic stay and, therefore, would be within the reach of its creditors, notwithstanding the foreign insolvency proceeding. This is an important concern to debtors like Daiichi, as, at any given time, one or more of its vessels may be docked in a United States port, subject to seizure by one of its creditors. But, by filing a Chapter 15 petition and obtaining the legal recognition of its foreign insolvency proceeding by a United States Bankruptcy Court, a foreign debtor’s assets located in the United States are protected by the automatic stay provisions of the Bankruptcy Code.
While Chapter 15 is a powerful tool for a foreign debtor, how does such a proceeding affect the debtor’s creditors in the United States? For example, domestic shippers in the interline transportation chain with Daiichi may possess claims against, or be subject to claims by, Daiichi. This article looks at what are generally the two most important concerns of creditors—(1) the filing of a proof of claimagainst the debtor and (2) whether the creditor may be subject to a preference suit—but through the lens of a Chapter 15 bankruptcy proceeding.
Most trade creditors are familiar with the concept of a proof of claim and the general requirement that a claim be filed to share in distributions made from a bankruptcy estate. While the claim procedure may be well understood in the context of a Chapter 7 or Chapter 11 bankruptcy proceeding, trade creditors must give close attention to the required procedures in a Chapter 15 case. While the procedures vary from case to case, oftentimes the foreign debtor will direct creditors to file claims in the foreign proceeding, not the Chapter 15 case. Thus, it is critical that trade creditors understand, among other things, where claims need to be sent and provide enough delivery time so that the claim arrives before the claim bar date, especially if the claim is being sent overseas.
Aside from timely filing a proof of claim, most trade creditors want to know if they have exposure to a preference lawsuit, which generally allows a debtor to recover payments made to a creditor within the 90 days prior to the filing of a bankruptcy proceeding. Fortunately for creditors, when Congress enacted Chapter 15 of the Bankruptcy Code, it did not give Chapter 15 debtors the same avoidance powers that it gave to Chapter 7 and Chapter 11 debtors. Subsequent decisions have confirmed that Chapter 15 debtors do not have authority to bring preference and fraudulent transfer actions; however, those debtors are generally permitted to exercise avoidance powers that arise under the law of the foreign proceeding. So, for instance, while a Daiichi creditor may not be faced with a typical preference suit, it could potentially be subject to an action arising under Japanese law. Thus, a trade creditor should still have a mechanism in place to closely monitor for complaints and other legal proceedings filed against it during the course of a Chapter 15 bankruptcy case.
With the recent downturn in certain European and Asian markets, trade creditors in the United States may find themselves involved in a Chapter 15 bankruptcy proceeding. While those creditors may be familiar with Chapter 7 and Chapter 11 proceedings, as this article indicates, a Chapter 15 case is distinguishable from those proceedings. Even routine concepts such as the filing of proofs of claim and preference litigation are different in a Chapter 15 proceeding. Creditors would therefore be well-advised to seek legal counsel in those circumstances.