United States Bankruptcy Courts, particularly in New York and Delaware, are already a destination for multinational corporate bankruptcy filings, but a recent study co-authored by Stephen J. Lubben, a Seton Hall Law School professor and frequent contributor to The New York Times’ DealBook blog, suggests that the current volume of foreign debtors filing in the U.S. may just be the tip of the iceberg. Lubben suggests that the dramatic increase in bond debt issued by foreign corporations, particularly in Europe, will lead to a commensurate surge in U.S. bankruptcy filings by foreign issuers looking to restructure debt held by investors around the world.
The U.S. Bankruptcy Code provides a host of benefits to debtors. Foreign entities are able to take advantage of these benefits provided they are able to establish minimal contacts in the U.S. Given the prevalence of New York as an international capital of finance, most corporations of a certain size, at a minimum, have a bank account in New York. Something as seemingly minor as this can be sufficient to establish the requisite nexus for a bankruptcy filing in New York. A principal advantage of U.S. bankruptcy law, as compared to that of many other jurisdictions, is that a filing in the U.S. creates a bankruptcy estate made up of all of the debtor’s property “wherever located” throughout the world. This attribute of U.S. bankruptcy law, allows corporations to administer all of their assets around the world without commencing procedures in each jurisdiction where they do business or own assets. Likewise, because most large, institutional creditors have financial contacts in the U.S., they are subject to an American bankruptcy court’s power to enforce the bankruptcy process regardless of the location of the debtor’s assets or operations. For a foreign debtor with mobile assets or assets in multiple countries, these are very attractive qualities. Indeed, Lubben’s study reveals that the vast majority of the 316 foreign-debtor cases reviewed were filed by debtors that were either part of a multinational corporate group or that owned movable assets (such as container ships).
The chapter 11 process offers some additional characteristics that are likely to be particularly enticing to troubled foreign companies with significant bond debt. Chapter 11 can be used to effectuate reorganizations that treat legally similar creditors differently, which is generally impermissible under other jurisdictions’ laws. For large corporations with complicated, multi-layered capital structures, a flexible reorganization process, like that afforded under chapter 11, is essential to a successful restructuring. In addition, the speed offered by pre-packaged and pre-negotiated bankruptcy cases, familiar to the specialized U.S. bankruptcy bench, provides an element of predictability for debtors in U.S. courts.
In a recent installment of the DealBook blog, Lubben points to the recent filing of Inversiones Alsacia as an example of a foreign debtor with significant bond debt taking advantage of the benefits of the U.S. bankruptcy process to reorganize its capital structure. Inversiones Alsacia, which filed for bankruptcy protection under chapter 11 in New York last month, operates the public bus system in Santiago, Chile and has no operations in the U.S. The Chilean company does, however, have seven bank accounts in New York, which it used to establish a nexus to the jurisdiction. By filing in New York, Inversiones Alsacia hopes to ensure that its restructuring will be binding on its creditors, most of which are American asset managers, notwithstanding the location of the company’s assets and operations. It remains to be seen whether the Inversiones Alsacia filing signals the trend predicted by Lubben.