Chapter 15 of the Bankruptcy Code was enacted in 2005 to create a procedure to recognize an insolvency or debt adjustment proceeding in another country and to, in essence, domesticate that proceeding in the United States. Once a foreign proceeding is “recognized,” a step which cannot be achieved without a foreign representative satisfying various requirements, the foreign representative may obtain certain protections from a United Stated bankruptcy court, including the imposition of the automatic stay to protect the foreign debtor’s property in the United States.

Since 2005, over 450 chapter 15 cases have been filed in the United States. Most of these filings have resulted in recognition of a foreign proceeding. Some requests for recognition have, however, been denied. Many of the reported decisions that resulted in the denial of recognition have focused on whether the foreign proceeding was pending in the country where the debtor’s “center of main interests” (also known as “COMI”) was located. For example, in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 373 B.R. 122 (Bankr. S.D.N.Y.), aff’d, 389 B.R. 325 (S.D.N.Y. 2008), one of the most highly publicized chapter 15 rulings, the court denied recognition to the liquidation of two Bear Stern’s hedge funds on the basis that the foreign proceeding was not pending in the debtors’ COMI.  

Interestingly, in 2011, almost the exact issues raised in the Bear Stearns opinion were revisited by the same court. However, the results appear to contradict the Bear Stearns ruling. A review of the new decision begins our 2011 highlights of chapter 15 bankruptcy decisions. We next turn our attention to a recent group of cases in which bankruptcy courts were required to decide whether to deny recognition or take other steps to limit bankruptcy court relief where approval of the request could be considered “manifestly contrary to the public policy of the United States.” See 11 U.S.C. § 1506.  

Offshore Funds’ Liquidation Granted Recognition

The Bankruptcy Court for the Southern District of New York recently recognized the Bermuda liquidations of two offshore funds — Millennium Global Emerging Credit Master Fund Ltd. and Millennium Global Emerging Fund Ltd. — as foreign main proceedings under chapter 15 of the Bankruptcy Code. See In re Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. 63 (Bankr. S.D.N.Y. 2011). At first glance, the facts are similar to those in the above-noted Bear Stearns case in that the Millennium Funds are funds that went into liquidation in an offshore jurisdiction. The Millennium Funds were incorporated and had their registered offices in Bermuda and were managed by an entity located in Guernsey. That manager, in turn, appointed Millennium Global Investments Ltd., a London-based organization, as investment manager for the Funds. Nearly three years after the Millennium Funds were placed into liquidation, the Bermuda liquidators requested recognition of the liquidations under chapter 15 of the Bankruptcy Code. Contending that the Millennium Funds’ COMI was the United Kingdom rather than Bermuda, BCP Securities, LLC, objected to recognition of the Bermuda liquidations as foreign main proceedings.  

In support of its objection, BCP noted that the management activities of Millennium took place in London and many creditors were located in the United Kingdom. Moreover, according to BCP, the Millennium Funds did not conduct any business at its Bermuda office. In response, the Millennium Funds’ liquidators argued that a debtor’s COMI should be determined as of the time that the chapter 15 petition was filed. Thus, according to the liquidators, the court should not consider the location and actions of Millennium London but should instead focus its analysis on the Bermuda liquidators who were overseeing the Funds as of the chapter 15 petition date.  

The court began its analysis by noting that COMI has been equated with “principal place of business.” The court noted that a liquidating debtor does not continue to operate and therefore cannot be said to have a principal place of business at the time of the filing of the chapter 15 petition. Thus, the date of the chapter 15 filing is not the appropriate date for determining a debtor’s COMI. Moreover, the court observed that using the date of the filing of the chapter 15 petition would allow foreign representatives to forum shop by transferring COMI immediately before seeking recognition. Ultimately, the court held that a debtor’s COMI should be determined as of the date on which the foreign proceeding for which recognition is being sought was commenced.  

Having determined the time frame on which a court should focus its analysis, the court considered the various factors (e.g., location of debtor’s headquarters, management, primary assets, majority of creditors) used by other courts to determine COMI. The court noted that (i) the majority of the Funds’ directors were located in Bermuda, (ii) those directors could in theory replace the Funds’ other agents, (iii) the Funds’ bank was located in Bermuda, (iv) the Funds’ custodian was located in Bermuda and (v) the Funds’ auditors were located in Bermuda. Moreover, the Millennium Funds’ offering memoranda and related documents described the Funds as Bermuda incorporated entities located in Bermuda and directed investors to transfer funds to a Bermuda-based account. Based on the foregoing facts, the court concluded that Bermuda was the only COMI “reasonably ascertainable by third parties.” Therefore, the court was satisfied that the liquidation of the Millennium Funds should be recognized as a foreign main proceeding.

The Millennium court’s decision to grant recognition appears to have been at least partially policy-driven. As the court recognized, “denial of any recognition to the Liquidators here would appear to deny them access to our judicial system and possibly prevent them from pursuing legitimate claims against third parties. This would disadvantage U.S. creditors who claim in the Bermuda proceedings.” In distinguishing the exclusionary principle suggested by the court in Bear Stearns, the Millennium court again observed that the Millennium Funds had more than mere “letter box” operations in Bermuda and thus had a legitimate basis for claiming COMI there. Thus, the court took the pragmatic approach of granting recognition where the alternative would have left U.S. creditors without a centralized forum for recovering on their claims.  

Limiting Chapter 15 Relief on Public Policy Grounds

Section 1506 of the Bankruptcy Code provides that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.” Courts have noted that this public policy exception must be narrowly construed and is limited to the most fundamental policies of the United States. In 2011, several courts elaborated on what would be “manifestly contrary” to United States public policy.

Privacy Rights

Chapter 15 permits a foreign representative to seek discovery concerning a debtor’s assets, affairs, rights, obligations, or liabilities. In general, discovery of a debtor’s personal financial information should be balanced against privacy interests. Thus, a bankruptcy court may deny a discovery request under chapter 15 — even though it would have been allowed under the law governing the foreign proceeding — on the grounds that the discovery request violated what might be considered fundamental privacy protections in the United States. The case of In re Toft, 453 B.R. 186 (Bankr. S.D.N.Y. 2011), involved a discovery request that raised such concerns.  

In June 2010, an involuntary administration proceeding was commenced in Germany against Dr. Jurgen Toft. When Dr. Toft failed to cooperate with the administration by, among other things, refusing to turn over certain documents, the German court entered a “mail interception order.” The order authorized the German administrator to intercept Dr. Toft’s physical and electronic mail. However, because certain of Dr. Toft’s emails were transmitted through, and stored on servers located in the United States, the German administrator was unable to obtain copies notwithstanding the German court’s order. Ultimately, the German administrator filed a chapter 15 case seeking recognition of the administration and enforcement of the mail interception order in the United States.  

Although the bankruptcy court acknowledged that mail interception orders are common practice under German law, it refused to enforce the order in the United States because doing so would violate fundamental United States public policies. In particular, the court noted that the privacy of electronic communications is subject to comprehensive legislation in the United States, including through the Wiretap Act, the Privacy Act and the Stored Communications Act. Under U.S. law, any individual intentionally intercepting electronic communications, such as the emails that would be subject to the mail interception order, may be subject to criminal and civil penalties. Such interceptions may only be authorized during the course of a criminal investigation and upon a “heightened showing of necessity.” Finding that recognition would, in this instance, be manifestly contrary to United States public policy by resulting in a violation of privacy rights, the bankruptcy court denied the request for chapter 15 recognition of the German proceeding.  

Due Process Rights

One of the fundamental features of U.S. law is that parties affected by a legal proceeding are entitled to due process and notice. A recent decision illustrates that a bankruptcy court may deny recognition to a foreign proceeding if creditors are deprived of any right to receive notice of or an opportunity to be heard. In In re Sivec SRL, No. 11-80799, 2011 WL 3651250 (Bankr. E.D. Okl. Aug. 18, 2011), the Italian liquidator of Sivec, an Italian company, sought recognition of Sivec’s Italian liquidation under chapter 15. It was undisputed that the liquidation satisfied the elements of a “foreign proceeding” and that Sivec’s COMI was in Italy. However, Zeeco, Inc., a creditor, opposed recognition on the grounds that recognition would violate U.S. public policy.  

Prior to liquidation, Sivec and Zeeco had entered into a contract pursuant to which Sivec agreed to manufacture certain industrial equipment for Zeeco. In 2008, Sivec went into liquidation in Italy. Zeeco was not provided with any notice of the liquidation. Moreover, the Italian liquidation did not give rise to a stay of litigation against Sivec. In 2010, Zeeco requested a judgment from a U.S. court declaring that it was entitled to retain a deposit it had received from Sivec. In response, the Italian liquidator argued that the deposit should be returned to Sivec. Ultimately, the Italian liquidator requested recognition of the Italian liquidation to obtain a stay enjoining, among other things, Zeeco’s litigation.  

Zeeco argued that Sivec’s failure to provide it with notice or the opportunity to be heard in the liquidation violated fundamental U.S. policy and warranted denial of recognition. The bankruptcy court disagreed and refused to deny recognition to the Italian liquidation. The bankruptcy court, however, was troubled by the Italian liquidator’s inability to provide any “explanation or assurance of how Zeeco’s rights [would] be protected should a turnover of the disputed funds be ordered.” According to the court, there were no procedures in Italy that would ensure resolution of Zeeco’s dispute with Sivec or payment on account of its claim. Thus, pursuant to section 1506 of the Bankruptcy Code, the bankruptcy court modified the stay to allow the litigation to continue in the United States such that Zeeco would be able to obtain a recovery against Sivec.

Licensee’s Rights

Under the Bankruptcy Code, a licensee’s right to use intellectual property cannot be unilaterally terminated by rejection in a licensor’s bankruptcy. Section 365(n) of the Bankruptcy Code generally provides that upon rejection, the licensee may (i) treat the contract as terminated, or (ii) retain its right to such intellectual property for the duration of the contract and any period of extension. Section 365(n) is not expressly incorporated into chapter 15, but a court has the power to apply this provision in a chapter 15 case in appropriate instances. See In re Qimonda AG, No. 09-14766, 2011 WL 5149831 (Bankr. E.D. Va. Oct. 28, 2011).  

Qimonda, AG is a German manufacturer of semi-conductor memory devices that was the subject of German insolvency proceedings recognized under chapter 15 of the Bankruptcy Code. In connection with recognition, the bankruptcy court issued an order making section 365 applicable to the chapter 15 case. Subsequently, the German liquidator sought and obtained an order providing that section 365 would apply only if the liquidator rejected an executory contract under section 365. This would permit the liquidator to terminate the license under German law and leave the licensee without the right to retain the intellectual property.  

Certain U.S. patent licensees appealed the bankruptcy court’s order. They argued that failure to apply section 365(n) would be manifestly contrary to U.S. public policy. The district court remanded the matter to the bankruptcy court to determine whether the failure of German law to afford licensees the protections they have under section 365(n) is manifestly contrary to U.S. public policy.  

In its review, the bankruptcy court reframed the inquiry as “whether the policy that § 365(n) seeks to promote is fundamental.” Reviewing the legislative history, the court noted that Congress enacted section 365(n) to address the concern that allowing licenses to be terminated in bankruptcy would encourage assignments instead of licenses, which would, in turn, reduce the financial return to the inventor licensor resulting from multiple licenses. The court noted that despite Congress’ determination that a licensee’s right to continue using intellectual property notwithstanding a licensor’s bankruptcy is “of great public importance,” Congress did not make section 365(n) applicable to all chapter 15 cases.

The court concluded that allowing licenses to be cancelled would create great uncertainty in the intellectual property markets and “undermine a fundamental U.S. public policy promoting technological innovation.” Therefore, to protect the patents and as permitted by the applicable statute and section 1506 of the Bankruptcy Code, the court mandated that section 365(n) apply with respect to Qimonda’s U.S. patents.

Take-Away Points

The last grouping of 2011 cases discussed demonstrates that a bankruptcy court will not simply “rubber stamp” a chapter 15 petition or the related relief that may be requested as part of such a proceeding. Where fundamental policies are at issue, creditors may have a basis to challenge the relief sought by a foreign representative. Ultimately, recognition of a foreign proceeding and/or the relief requested is dependent on the facts and circumstances of the particular case.