Creative Finance: U.S. Bankruptcy Courts Will Not Tolerate Manipulation of COMI and Bad Faith Uses of Chapter 15

January 2017

Journal of Bankruptcy Law

In chapter 15 practice, recognition of a foreign proceeding (whether a main or nonmain proceeding) focuses on specific statutory bona fides. To prosecute a chapter 15 in the United States, a properly authorized representative of a foreign debtor has to provide a U.S. Bankruptcy Court with straightforward evidence of the raising of a proceeding under foreign insolvency laws, which are designed to create a collective remedy, in a jurisdiction where a foreign debtor either has an “establishment” or a “center of main interests.” Courts have noted that Chapter 15 does not contain a provision for dismissal for cause and that the intentions of the foreign representative in seeking relief generally are not germane to the findings required of an American bankruptcy court under Sections 1515 and 1517 of Title 11 of the U.S. Code.

Further, the U.S. Court of Appeals for the Second Circuit in Morning Mist Holdings Ltd. v. Krys (In the Matter of Fairfield Sentry Ltd.), has held that a foreign debtor’s “center of main interests” (“COMI”) is to be determined as of the commencement of the Chapter 15 case. This has permitted foreign debtors in liquidation in so-called “letterbox” jurisdictions—places where a liquidating or liquidated debtor did not operate, but where the debtor is registered as a business organization—to obtain recognition of foreign liquidation proceedings pending in the “letterbox” jurisdictions. There is nothing generally improper about this, as a liquidation in bankruptcy can serve a collective purpose and can be very complex.

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Creative Finance: U.S. Bankruptcy Courts Will Not Tolerate Manipulation of COMI and Bad Faith Uses of Chapter 15,” by Michael B. Schaedle was published in the January 2017 edition of Pratt’s Journal of Bankruptcy Law. Reprinted with permission.

This article was first published in the September 2016 edition of Blank Rome’s quarterly maritime newsletter, Mainbrace.