Bankruptcy and Restructuring Litigation Update - February 2023

Foreign companies seeking reorganization have two main options for availing themselves of the advantages of generally debtor-friendly U.S. bankruptcy law: (i) chapter 11 reorganization and (ii) chapter 15 recognition of foreign proceedings.

I. Chapter 11 Reorganization

A debtor files a voluntary petition under chapter 11 to reorganize its business affairs, debts, and assets.  Upon simply filing a chapter 11 petition, an automatic stay is enforced against all creditors of that debtor, which means the creditors are prohibited from attempting to collect money or seize assets from the debtor and may not initiate or continue any legal actions against the debtor.

A Chapter 11 proceeding provides numerous other benefits to a distressed corporation, including its ability to: (1) obtain emergency relief from the bankruptcy court to continue operating and paying employees; (2) initiate litigation, known as an adversary proceeding, to recover assets and have such dispute resolved speedily by the bankruptcy court; (3) obtain immediate and broad discovery, including documents and deposition testimony, without pending litigation; (4) assume or reject unexpired contracts and leases, meaning that the debtor can choose whether to continue with a certain contract or lease that may be beneficial or rid itself of disadvantageous contracts or leases; (5) sell property free and clear of any liens or other interests; and (6) obtain financing to help the debtor operate its business during the bankruptcy. 

II. Chapter 15 Ancillary Proceeding

Chapter 15 governs the administration of the U.S. assets of a company subject to a foreign insolvency proceeding, or “foreign main proceeding.”  A debtor may file a proceeding under chapter 15 when it has an insolvency proceeding pending in another country, and, upon recognition of the foreign proceeding, a U.S. bankruptcy court defers to the foreign court (unless a ruling of a foreign court would be manifestly contrary to the public policy of the U.S.).  Although certain relief is not available in chapter 15, such as some causes of action grounded in U.S. Bankruptcy Code, other relief, such as automatic stay, takes effect later, when the court grants a motion or a recognition of the foreign proceeding.

Chapter 11 is a plenary proceeding, in which the U.S. bankruptcy court has authority over all assets of the debtor, wherever—at least in theory—located. On the other hand, chapter 15 is an ancillary proceeding, in which the U.S. bankruptcy court only has jurisdiction over assets of the debtor that are located in the United States. 

III. Advantages of U.S. Bankruptcy Proceedings

Whether chapter 11 or chapter 15, U.S. bankruptcy proceedings share key common principles:

In the United States, the bankruptcy court is a court of equity.  This means that the bankruptcy judge is empowered with rights to administer the bankruptcy in a way that attempts to be fair and just to all parties. 

Furthermore, a U.S. bankruptcy court proceeding is transparent, with public dockets (and sometimes open access websites) providing access to all documents filed in a bankruptcy case.  The procedures provide ability to attend hearings and require sufficient notice to all interested parties to a case. 

Finally, a bankruptcy proceeding in the United States is generally known for being speedy, permitting emergency motions that can be heard in a matter of days; even regular motions are typically heard within weeks and generally decided promptly, if not during the hearing. As to litigation that finds its way into a bankruptcy court through an adversary proceeding or contested matter, a bankruptcy court also generally hears and decides such disputes in an expedited timeframe that is much faster than in other U.S. federal or state courts.

A U.S. bankruptcy judge is also equipped to handle the interpretation of foreign law, a key consideration for the foreign debtor.  Indeed, it has become increasingly common for a bankruptcy court to interpret foreign law, and it has authority to do so under U.S. federal procedural rules. In practice, it allows bankruptcy courts to hear testimony from foreign law experts and analyze documents (translated into English) interpreting foreign law, at any stage of the litigation proceeding.  It also permits the court to engage in its own research of foreign law.

A bankruptcy proceeding is a very real option for foreign debtors.  To take advantage of a bankruptcy proceeding in the United States, the foreign debtor needs to reside or have a domicile, place of business, or property in the United States.  Courts interpret this provision broadly, and even a nominal amount of property in the United States, such as a claim against a creditor or a bank account, even one opened for the purpose of the bankruptcy itself, is sufficient.       

Thus, a bankruptcy proceeding in the United States is accessible and offers valuable benefits to the foreign debtor, and a U.S. bankruptcy court is equipped with the tools to administer cross-border insolvency proceedings.

IV. Jurisdiction over Foreign Debtors and Creditors

One limitation, however, to a U.S. bankruptcy court’s ability to resolve disputes in a bankruptcy case is its jurisdiction over parties outside of the United States.  A U.S. bankruptcy court is special, however, in that it has jurisdiction over the debtor as well as over property of the debtor’s estate “wherever located and by whomever held.”

In practice, however, a bankruptcy court is powerless to enforce its rulings over the debtor’s property against someone interfering with it who is located outside of the United States.  The bankruptcy court lacks personal jurisdiction over such person to be able to enforce a ruling, and in those instances, a foreign court’s assistance is needed to enforce the bankruptcy court’s order. 

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U.S. bankruptcy offers numerous benefits to the foreign debtor, but it must also carefully consider its unique circumstances in deciding where to file for insolvency.  Cross-border insolvency proceedings are still in their infancy, with many issues unresolved and much unchartered territory.  For the foreign creditor, knowledge of the options and the limitations with respect to a bankruptcy filing are crucial in protecting its own rights.