On Friday 21 October 2011, the Bankruptcy Court in the Southern District of New York handed down an important decision, confirming that foreign (groups of) companies can use Chapter 11 without any significant threshold as to their nexus with the United States. This may be good news for corporates that seek to use Chapter 11 for restructuring their business or capital structure.
It is now clear that even very limited property in the U.S. is sufficient to qualify for a reorganisation through Chapter 11.
For banks and other creditors the Bankruptcy Court's decision may be bad news. They may be confronted more often with debtors successfully protecting themselves with Chapter 11's automatic worldwide stay against – otherwise legitimate – enforcements on collateral and other recourse actions.
On 29 July 2011, the Dutch limited liability company Marco Polo Seatrade B.V. (MPS) and three of its Dutch group companies filed a voluntary petition with the United States Bankruptcy Court in the Southern District of New York, for relief and commencement of cases under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code). The MPS companies own and operate six ocean-going tanker ships. Their principal financing consists of two facilities, the first of approximately USD 90 million, with Crédit Agricole as agent, and the second of approximately USD 118 million, with Royal Bank of Scotland as agent. The facilities are secured by mortgages on the ships.
Before the filing of their Chapter 11 cases, the MPS companies and their banks, predominantly Crédit Agricole, were engaged in out of court negotiations relating to a potential restructuring of the companies' business and capital structure. However, around 21 July 2011 that process apparently broke down: Crédit Agricole had one of the ships mortgaged to it arrested in a UK port and swept certain cash accounts pledged to it by the MPS companies. Eight days later, the MPS companies filed for Chapter 11. Another month later, the MPS companies filed a motion with the Bankruptcy Court for contempt of court sanctions against Crédit Agricole. MPS held that Crédit Agricole was in violation of the automatic worldwide stay (the suspension of enforcements and other recourse actions of creditors against a Chapter 11 debtor that automatically becomes effective when a petition for Chapter 11 is filed).
The contempt of court motion was withdrawn following a settlement between MPS and the banks – pursuant to which the arrested ship was released – but on 12 September 2011, both Crédit Agricole and RBS filed motions in which they (among other things) sought dismissal of MPS's Chapter 11 cases. Their arguments were, in essence, that MPS's cases did not belong in a U.S. court as the companies were foreign, had no sufficient nexus with the U.S. and had only filed their cases in order to benefit from the automatic stay, rather than with any realistic plan for reorganisation.
Chapter 11 for foreign companies – is a peppercorn in the U.S. enough for jurisdiction?
Foreign companies have successfully used Chapter 11 in the past. In 2010, for instance, the Almatis group successfully implemented its financial restructuring using Chapter 11 proceedings. The ultimate holding structure of the Almatis group consisted also of Dutch companies; operating companies were located in the Netherlands, the U.S. and other non-U.S. jurisdictions including Germany, India and China (to find out more about this case and De Brauw's involvement in it, please visit our website). Nonetheless, some have raised issues as to the jurisdiction of U.S. bankruptcy courts to hear Chapter 11 cases with respect to foreign debtors. Could even foreign debtors without a truly material connection with the U.S. reorganise through U.S. proceedings? The case discussed in this legal alert provides the answer: yes they can.
In the MPS case, the jurisdiction issue was raised on a fundamental level and heavily contested. 11 U.S.C. §109(a) provides who can be a debtor under the U.S. Bankruptcy Code:
"(…) only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title."
In their motions, RBS and Crédit Agricole argued that MPS's cases did not belong in a U.S. bankruptcy court as there was insufficient basis for jurisdiction. In their view, the MPS companies are Dutch entities and have no relevant assets in the United States. Furthermore:
- Their affiliates are foreign entities
- Their vessels operate under foreign flags
- They have no offices or employees in the U.S.
- Their loan documents (the facilities) are governed by foreign law and provide for foreign courts to have exclusive jurisdiction over disputes arising under these documents
- The secured creditors of the MPS companies, as well as the members of the unsecured creditors’ committee appointed in the Chapter 11 cases, are foreign entities
The banks also alleged that the MPS companies filed their petitions for Chapter 11 only with a view to frustrating the enforcement actions of Crédit Agricole and RBS, rather than with a viable reorganisation plan or strategy. In RBS's view, the MPS companies wanted to wait for better times in the shipping industry under the protection of the automatic stay.
A forum non conveniens type argument was put forward as well: that the courts of the Netherlands would be available to MPS and would be a more appropriate venue for hearing the matter.
In their opposition to the motions, the MPS companies argued that the requirements for jurisdiction of the Bankruptcy Court were satisfied, as they had both property and a place of business in the Southern District of New York. As far as property in the U.S. was concerned, the MPS companies cited case law according to which:
“courts have required only nominal amounts of property to be located in the United States, and have noted there is ‘virtually no formal barrier’ to having federal courts adjudicate foreign debtors’ bankruptcy proceedings."
"[11 U.S.C. §109(a) leaves the] Court no discretion to consider whether (…) to permit someone to obtain a bankruptcy discharge solely on the basis of having a dollar, a dime or a peppercorn located in the United States”
Against that background, the MPS companies relied on primarily three facts to demonstrate their possession of property in the U.S.:
- At the filing date, nearly USD 1 million was held for one of the MPS companies in a pooled escrow account in a bank in New York, representing that company's share of the freight income from a shipping pool in which some of the MPS vessels operated. The account was in the name of the agent operating the pool
- One debtor had established a retainer, for the benefit of all debtors, of USD 250,000 with their U.S. bankruptcy counsel before filing their cases
- The mortgages on the ships were established in New York and the register in which those mortgages were registered was physically held in New York as well
In support of MPS assertions that they maintained a place of business in the U.S., the MPS companies pointed to the fact that they had an agent in New York through whom they conducted business (namely, the operator of the shipping pool).
MPS countered the banks' argument that the Netherlands would be a proper venue for reorganising by pointing out some of Dutch bankruptcy laws' flaws, on account of which filing Dutch insolvency proceedings would de facto result in liquidation. Dismissing the Chapter 11 cases (in favour of such proceedings) would therefore be in the interest of neither the MPS companies, nor their creditors. The MPS companies argued that at the same time, the U.S. had an interest in maintaining the cases. Through the voyages of their vessels to the U.S., MPS generated U.S. employment, revenues and taxes. Their secured creditors were financial entities with substantial ties to the U.S. MPS had U.S. unsecured creditors larger in aggregate amount than their Dutch unsecured creditors.
The MPS companies also contested that they had only filed Chapter 11 to benefit from the protection of the automatic stay, without any realistic prospects of reorganising.
MPS received support from the official committee of unsecured creditors, broadly based on the same arguments as put forward by the MPS companies themselves. In addition, the Committee emphasised: "American bankruptcy is working for creditors.", as it had stabilised the companies and their business, preserving going concern value and enhancing the chances that the unsecured creditors would ever get a recovery on their claims.
Motions dismissed: an interest in an escrow account and a retainer can be sufficient
On 21 October 2011, the Bankruptcy Court dismissed the motions for dismissal of Crédit Agricole and RBS.
Judge James M. Peck, turning first to MPS's assertions that jurisdiction was established through MPS’s relationship with the shipping pool operator, as agent, and the creation of the mortgages, held that such was insufficient as a basis for jurisdiction of a U.S. Bankruptcy Court.
Next, Judge Peck considered whether the MPS companies each had property in the U.S. He found that one debtor – the party to the agreement governing the pooled escrow account – was entitled to and had a property interest in the monies held in escrow for it by the shipping pool agent. All MPS companies had property in the form of their share in the retainer that had been wired by one of them to the account of their U.S. counsel.
Accordingly, the requirements of 11 U.S.C. §109(a) for jurisdiction were met. Judge Peck clarified that the size of the property held by the debtor in the U.S. was not relevant. It only matters whether or not the property is located in the U.S. The banks' arguments that the retainer had been posted in bad faith – e.g. with the sole purpose of creating jurisdiction – or that the entire Chapter 11 cases had been filed in bad faith were dismissed as the Judge had not found convincing evidence for them.
Judge Peck explained that a Chapter 11 case can, pursuant to 11 U.S.C. §305(a), be dismissed (or suspended, which had not been asked for by the banks) only if either:
- the interests of creditors and the debtor would be better served by such dismissal or suspension, or
- (A) a petition under section 1515 for recognition of a foreign proceeding has been granted, and (B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension
The requirements of subsection (1) were not met in this case, as Crédit Agricole and RBS had failed to demonstrate that the interests of all of MPS's creditors would be better served by dismissal of the Chapter 11 cases, which is a strict requirement. Subsection (2) – relating to the possibility of recognition of foreign bankruptcy proceeding in the U.S. – was not applicable, as no such foreign proceeding with respect to MPS was pending. Judge Peck did hint in his judgment that, in case of proceedings pursuant to the provisions of Chapter 15 of the U.S. Bankruptcy Code, the area of main interest would undoubtedly be the Netherlands. In other words, when creditors of the MPS companies would commence Dutch bankruptcy proceedings, those would likely be recognised in the U.S., providing a ground for suspension or dismissal of the Chapter 11 cases of the MPS companies.
For corporates, the MPS case makes clear that Chapter 11 is available for European and other non-U.S. (groups of) companies as a means of implementing a restructuring or reorganisation. Cases filed by foreign companies will not easily be dismissed by a U.S. Bankruptcy Court – at least not the Bankruptcy Court in the Southern District of New York – because a debtor lacks sufficient nexus with the U.S. or filed its case to defend itself from creditor enforcement actions without, at that point, a viable reorganisation plan.
Why would European corporates consider filing Chapter 11?
- Chapter 11 is a versatile and sophisticated restructuring tool, which may especially attract companies from several European jurisdictions where the local insolvency laws do not provide good possibilities for implementing a restructuring
- Chapter 11 provides one, consolidated formal restructuring process for multinational groups consisting of entities dispersed over various jurisdictions, something that seems hardly possible otherwise (even under the European Insolvency Regulation).
One serious issue to consider is that the U.S. proceedings may not be recognised in many EU countries. In that case, Chapter 11 may have to be combined with local proceedings, adding a layer of complication. If that does not work or is insufficient, European companies using Chapter 11 will likely have to rely on the in personam jurisdiction of the Bankruptcy Court as a sufficient deterrent for creditors against violating the provisions of the U.S. Bankruptcy Code or the Bankruptcy Court's orders.
In personam jurisdiction is, in short, the jurisdiction assumed by U.S. Bankruptcy Courts over the person of any defendant in a case, on which summons have been served, includingforeign persons and companies. A foreign creditor ignoring Chapter 11 proceedings and its effects and outcomes (notably the automatic stay) could be held in contempt of court and the sanctions imposed by the Bankruptcy Court as a result thereof could be enforced against the creditor and its assets. Only a creditor that does not, and will not in the future have, any ties at all with the U.S., can afford to risk that. Financial institutions and multinational corporates usually cannot.
For banks and other creditors, the MPS case may lead to the somewhat startling conclusion that debtors may effectively prevent, stop or at least delay enforcements and other recourse actions against such debtor's assets by filing (emergency) Chapter 11 cases in the U.S., no matter where the debtor is domiciled, regardless of whether it has any significant ties with the U.S., of whether finance documents may contain choice of law and forum clauses, and of where the assets are located against which recourse is sought. If a creditor has or will in the future have any connection with the U.S., the automatic stay can be effectively enforced against it through the Bankruptcy Court's in personam jurisdiction.
How can creditors counter? As Judge Peck's judgment has made clear, abstract forum non conveniens type arguments will not work to get a Chapter 11 case filed by a debtor off the table. A creditor seeking dismissal of a Chapter 11 case filed by its non-U.S. debtor will, if it truly believes that its interests are better served by proceedings in the debtor's home jurisdiction or elsewhere, actually have to commence such proceedings. If successful, the creditor can seek recognition of such proceedings pursuant to Chapter 15 of the U.S. Bankruptcy Code and subsequently suspension or dismissal of the pending Chapter 11 case based on 11 U.S.C. §305(a).