The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) introduced the most comprehensive amendments to United States bankruptcy law in 25 years. Among the BAPCPA amendments was the creation of Chapter 15, which incorporates the provisions of the United Nations Commission on International Trade Law (“UNCITRAL”) Model Code on Cross-border Insolvency (“Chapter 15”) and sets out the procedures to be followed in a court application for recognition of foreign proceedings.

In a recent decision, Morning Mist Holdings Limited v. Krys (In re: Fairfield Sentry Ltd), 11-4376 (2nd Cir. April 16, 2013), the Second Circuit affirmed the rulings of both the Bankruptcy Court and the District Court wherein both courts held Fairfield Sentry Limited (Sentry) had its center of main interest (COMI) in the British Virgin Islands (BVI). Accordingly, Sentry's previously filed liquidation in the BVI would be recognized under Chapter 15 of the Bankruptcy Code and the automatic stay would apply to any proceedings filed in the United States pursuant to sections 362 and 1520 of the Bankruptcy Code.


Sentry was organized in 1990 as an International Business Company under the laws of the BVI. From 1990 until Bernard Madoff’s arrest on December 11, 2008, Sentry was the largest of the alleged “feeder funds” that invested with Bernard L. Madoff Investment Securities LLC (“BLMIS”). Roughly 95% of Sentry’s assets were invested with BLMIS, totaling over $7 billion. Sentry had a registered office, registered agent, registered secretary, and corporate documents were all located in the BVI. However, Sentry’s day-to-day operations were handled by an investment manager based in New York. Sentry’s three directors resided in New York, Oslo and Geneva, respectively. When Madoff was arrested, two of Sentry’s directors suspended all share redemptions. Sentry entered liquidation on July 21, 2009, upon entry of an order of the BVI Court pursuant to the Virgin Islands Insolvency Act of 2003 (“BVI Liquidation”). However, in May 2009, Morning Mist Holdings (“Morning Mist”), a Sentry shareholder, filed a derivative suit against Sentry in New York state court. In June 2010, Sentry petitioned the United States Bankruptcy Court of the Southern District of New York (the Bankruptcy Court) to recognize the BVI Liquidation. During this period, a number of actions had been commenced against Sentry, including matters in the Netherland and Ireland.

On July 22, 2010, the Bankruptcy Court granted the liquidator's petition and recognized the BVI Liquidation as a "foreign main proceeding" under section 1517(b)(1) of the Bankruptcy Code. Morning Mist appealed. The United States District Court for the Southern District of New York (District Court) upheld the Bankruptcy Court's ruling.

The Second Circuit’s Ruling

The Second Circuit held that for a proceeding to be recognized as a “foreign main proceeding” and receive the protections of Chapter 15 of the Bankruptcy Code it must be pending in the country where the debtor has its COMI. The Second Circuit rejected the proposition that "principal place of business" should be used to determine COMI. The Second Circuit noted that Congress chose the concept of COMI instead of “principal place of business” on purpose as COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and therefore ascertainable by third parties.

The Second Circuit adopted a two-part test to consider where a debtor’s COMI is located: (1) relevant time period for weighing interests, and (2) principal factors for determining which jurisdiction predominates. With respect to “time”, a court should look to the time period when the Chapter 15 petition was filed. However, a court may review the period between the filing of the foreign proceeding and the filing of the Chapter 15 petition to ensure the debtor has not manipulated its COMI in bad faith. With respect to factors, the Second Circuit included: the location of the debtor’s liquidation activities and administrative functions. The Second Circuit noted that Chapter 15 creates a rebuttable presumption that a debtor’s registered office is presumed to be the debtor’s COMI. 11 U.S.C. § 1516(c).

Morning Mist argued that “public policy” exceptions under 11 U.S.C. § 1506 should have been applied because the BVI Liquidation are kept confidential. This argument was summary rejected by the Second Circuit noting that “the right to inspect and copy juridical records is not absolute.”

This new opinion by the Second Circuit will help shed light on this important, but often murky area of international law and the Bankruptcy Code.