U.S. Bankruptcy Court Can Enforce Foreign Restructuring Plan Providing for Cancellation of U.S. Law-Governed Debt

Even before chapter 15 of the Bankruptcy Code was enacted in 2005 to govern cross-border bankruptcy proceedings, the enforceability of a foreign court order approving a restructuring plan that modified or discharged U.S. law-governed debt was well recognized under principles of international comity. The U.S. Bankruptcy Court for the Southern District of New York recently reaffirmed this concept in In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022). The court granted a petition seeking recognition of a debtor's Cayman Islands restructuring proceeding under chapter 15 for the purpose of enforcing a court-sanctioned scheme of arrangement that canceled New York law-governed notes in exchange for new notes (also governed by New York law). 

Because the debtor conducted business through its subsidiaries in China before filing its Caymans restructuring proceeding, the U.S. Bankruptcy Court considered the possibility that the debtor might seek to enforce the scheme in Hong Kong, where a court recently suggested that chapter 15 recognition by a U.S. court of a foreign proceeding involving the cancellation of U.S. law-governed debt does not discharge the debt. The U.S. bankruptcy court explained that the Hong Kong court misconstrued U.S. law on this point, writing: "To be clear, in recognizing and enforcing the Scheme in this case, the Court concludes that the discharge of the Existing Notes and issuance of the replacement notes is binding and effective." 

Recognition Under Chapter 15

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.

Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts. 11 U.S.C. § 1501(a). 

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:

[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c).

However, this presumption can be overcome. See In re ABC Learning Centres Ltd., 445 B.R. 318, 328 (Bankr. D. Del. 2010) (stating that "the COMI presumption may be overcome particularly in the case of a 'letterbox' company not carrying out any business" in the country where its registered office is located), aff'd, 728 F.3d 301 (3d Cir. 2013).

Various factors have been deemed relevant by courts in determining a debtor's COMI, including the location of the debtor's headquarters, managers, employees, investors, primary assets, and creditors, as well as the jurisdiction whose law would apply to most of the debtor's disputes. See In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), aff'd, 371 B.R. 10 (S.D.N.Y. 2007). In addition, courts have considered any relevant activities, including liquidation activities and administrative functions. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). Courts may also consider the situs of the debtor's "nerve center," including the location from which the debtor's "activities are directed and controlled, in determining a debtor's COMI." Id. at 138. "[R]egularity and ascertainability" by creditors are also important factors in the COMI analysis. Id.; In re British Am. Ins. Co., 425 B.R. 884, 912 (Bankr. S.D. Fla. 2010) ("The location of a debtor's COMI should be readily ascertainable by third parties."); In re Betcorp Ltd., 400 B.R. 266, 289 (Bankr. D. Nev. 2009) (looking to the ascertainability of COMI by creditors). Creditors' expectations regarding the location of a debtor's COMI are also relevant. See In re Serviços de Petróleo Constellation S.A., 613 B.R. 497 (Bankr. S.D.N.Y. 2019); In re Oi Brasil Holdings Coöperatief U.A., 578 B.R. 169, 228 (Bankr. S.D.N.Y. 2017). 

COMI can sometimes be found to have shifted, or "migrated," from a foreign debtor's original principal place of business or habitual residence to a new location. See In re Pirogova, 593 B.R. 402, 410 (Bankr. S.D.N.Y. 2018); In re Creative Finance Ltd. (In Liquidation), 543 B.R. 498 (Bankr. S.D.N.Y. 2016). In Fairfield Sentry, the Second Circuit ruled that, due principally to the present verb tense of the language of section 1517, the relevant time for assessing COMI is the chapter 15 petition date, rather than the date a foreign insolvency proceeding is commenced with respect to the debtor. The Fifth Circuit previously reached the same conclusion in In re Ran, 607 F.3d 1017 (5th Cir. 2010), as did the bankruptcy court in British American.

In Fairfield Sentry, the Second Circuit also expressed concern about possible COMI "manipulation," ruling that a court "may look at the period between the commencement of the foreign proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith." Fairfield Sentry, 714 F.3d at 138; see also In re O'Reilly, 598 B.R. 784 (Bankr. W.D. Pa. 2019) (denying the petition of a foreign bankruptcy trustee for recognition under chapter 15 of a debtor's Bahamian bankruptcy and finding that, although the Bahamian bankruptcy was otherwise eligible for recognition, the debtor's COMI was no longer in the Bahamas when the Bahamian trustee filed the chapter 15 petition and the trustee failed to demonstrate that the debtor even had an "establishment" there); In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017) (ruling that scheme of adjustment proceedings pending in the Cayman Islands should be recognized as "foreign main proceedings" under chapter 15, even though the debtors' COMI had been shifted to the Caymans less than a year before the proceedings were commenced, because the country in which the debtors' COMI had previously been located did not have a law permitting corporate restructurings), appeal dismissed, 585 B.R. 31 (S.D.N.Y. 2018), aff'd, 2019 WL 1276205 (2d Cir. Mar. 19, 2019); In re Suntech Power Holdings Co., 520 B.R. 399 (Bankr. S.D.N.Y. 2014) (the court-appointed liquidators of a Cayman Islands-incorporated debtor in a Cayman liquidation proceeding did not manipulate the debtor's COMI in bad faith where, although the debtor's COMI prior to filing its chapter 15 petition was in China, where the debtor was managed, and the debtor did not conduct any activities in the Caymans, the liquidators, after assuming control of the debtor's affairs, performed substantial liquidation activities in the Caymans such that its COMI legitimately shifted to the Caymans).

An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. See British American, 425 B.R. at 915.

After recognition of a foreign proceeding, section 1521(a) authorizes the bankruptcy court, upon the request of the foreign representative, to grant a broad range of relief designed to preserve the foreign debtor's assets or otherwise provide assistance to the court or other entity presiding over the debtor's foreign proceeding. Such post-recognition relief "is largely discretionary and turns on subjective factors that embody principles of comity." In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 329 B.R. 325, 333 (S.D.N.Y. 2008).

However, section 1522 provides that the bankruptcy court may grant relief under section 1521 "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."

Similar to section 1521(a), section 1507 of the Bankruptcy Code states that, post-recognition, the court may provide "additional assistance" to a foreign representative under the Bankruptcy Code "or under other laws of the United States." In determining whether to provide such relief, the court must consider whether such assistance, "consistent with the principles of comity," will reasonably ensure, among other things: (i) just treatment of all creditors and interest holders; (ii) protection of U.S. creditors "against prejudice and inconvenience in the processing of claims in such foreign proceeding"; and (iii) "distribution of proceeds of the debtor's property substantially in accordance with the order prescribed" in the Bankruptcy Code.

Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing 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."

Post-recognition relief under sections 1507 and/or 1521 commonly includes an order enforcing in the United States the terms of a restructuring plan approved by the foreign court overseeing the debtor's bankruptcy case. See, e.g., In re Arctic Glacier Int'l, Inc., 901 F.3d 162 (3d Cir. 2018); In re Condor Flugdienst GmbH, 627 B.R. 366, 372 (Bankr. N.D. Ill. 2021); In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018); In re Oi S.A., 587 B.R. 253 (Bankr. S.D.N.Y. 2018); In re Avanti Commc'ns Grp. PLC, 582 B.R. 603 (Bankr. S.D.N.Y. 2018); In re Cell C Proprietary Ltd., 571 B.R. 542 (Bankr. S.D.N.Y. 2017); In re Rede Energia S.A., 515 B.R. 69 (Bankr. S.D.N.Y. 2014); see also In re Lupatech S.A., 611 B.R. 496, 502 (Bankr. S.D.N.Y. 2020) ("Appropriate relief under section 1521 includes enforcing a foreign order confirming a debtor's plan."). 

Modern Land

Incorporated in the Caymans, Modern Land (China) Co., Ltd ("MLC") is a Hong Kong stock exchange-listed holding company for a large group of real estate development businesses, most of which are incorporated in the Caymans or the British Virgin Islands ("BVI"), but that conduct business principally or exclusively in China. MLC's $4.32 billion in debt as of June 30, 2021, included $1.42 billion in notes (the "Old Notes") governed by New York law. MLC's $12.49 billion in consolidated assets were located in China or the United States.

Liquidity concerns arising during the pandemic caused MLC to default on its debt in 2021.

After defaulting on the Old Notes in 2021, MLC entered into a restructuring support agreement with the holders of 80.75% of the Old Notes (representing approximately $1.08 billion in principal).

In April 2022, MLC commenced a reorganization proceeding in a Cayman court under the Cayman Islands Companies Act (2022) (the "Cayman proceeding") seeking to confirm a scheme of arrangement (the "scheme") and asking the court to appoint a foreign representative for the company.

Under the proposed scheme, the claims based on the Old Notes would be released, and each holder of the Old Notes (the "Old Noteholders") would receive a pro rata share of: (i) approximately $22 million in cash; and (ii) new notes (the "Scheme Notes") governed by New York law. The scheme also provided for the cancellation of New York law-governed Old Note guarantees, the issuance of new guarantees governed by New York law, and releases by Old Noteholders of MLC and its affiliates. None of MLC's remaining debt would be restructured under the scheme.

The Old Noteholders overwhelmingly approved MLC's scheme, and the Cayman court approved it July 2022.

In anticipation of the Cayman court's approval, MLC's foreign representative filed a petition on June 3, 2022, in the U.S. Bankruptcy Court for the Southern District of New York seeking recognition of the Cayman proceeding under chapter 15 and enforcement of the scheme.

The Bankruptcy Court's Ruling

Before examining whether chapter 15 recognition of the Cayman proceeding was appropriate, U.S. Bankruptcy Judge Martin Glenn addressed a pair of decisions issued by a Hong Kong court suggesting that a U.S. court, after recognizing a foreign restructuring proceeding, could not enforce a scheme of arrangement sanctioned by a foreign court providing for the modification or discharge of debt governed by U.S. law. 

In June 2022, a Hong Kong court issued a ruling in In the Matter of Rare Earth Magnesium Technology Group Holdings Ltd. [2022] HKCFI 1686, in which it stated in dicta that "recognition under Chapter 15 is limited in territorial effect and [the court thinks] it is reasonable to assume that the reason for this is that the procedure does not discharge the debt." In its opinion, the Hong Kong court relied on Judge Glenn's decision in Agrokor, where he stated that "Section 1520(a)(1) provides that the automatic stay will apply to all the debtor's property that is located with the territorial jurisdiction of the United States." The Hong Kong court read this pronouncement to mean that "[r]ecognition does not appear as a matter of United States' law to discharge the debt."

In a ruling in another case—In the Matter of an application for recognition and assistance by the provisional liquidator of Global Brands Group Holding Limited (in liquidation), HCMP 644/2022, [2022] HKCFI 1789—the Hong Kong court stated that, in assessing whether it would recognize and enforce any future scheme sanctioned in the Caymans or BVI, the court would look to the debtor's COMI rather than its place of incorporation, as had been done in the past, to determine whether recognition and enforcement are warranted.

Judge Glenn explained that whether MLC's scheme could modify or discharge existing debt and guarantees governed by New York law, and provide for the issuance of new debt and guarantees governed by New York law, was "a critically important issue" in this and in "many other scheme or restructuring cases." Modern Land, 641 B.R. at 776. 

"With great respect for the Hong Kong court," Judge Glenn further explained, the court misinterpreted his decision in Agrokor, "as well as many other decisions in the United States which have recognized and enforced foreign court sanctioned schemes or restructuring plans that have modified or discharged New York law governed debt." Id. Provided a foreign court properly exercises jurisdiction over a foreign debtor in an insolvency proceeding and the foreign court's procedures comport with "broadly accepted" principles of due process, he wrote, "a decision of the foreign court approving a scheme or plan that modifies or discharges New York governed debt is enforceable." According to Judge Glenn, this "unremarkable proposition" has been firmly established in the United States for more than a century. Id. (citing Canada Southern Ry. Co. v. Gebhard, 109 U.S. 527 (1883)). 

In Agrokor, Judge Glenn explained, he enforced the modification of both English law- and New York law-governed debts pursuant to a settlement reached as part of a Croatian insolvency proceeding, even though, in doing so, the court refused to extend comity to the "Gibbs Rule," whereby courts in Commonwealth jurisdictions have refused since 1890 to recognize or enforce foreign court judgments or proceedings that discharge or compromise debts governed by English law. Based on Agrokor, Judge Glenn saw no impediment to recognizing the scheme in Modern Land, particularly as it was unlikely that a court in Hong Kong would be asked to consider whether the scheme was effective in Hong Kong (in which Commonwealth law has been generally applicable).

Having addressed this preliminary, albeit "critically important," issue, the bankruptcy court examined whether chapter 15 recognition of the Cayman proceeding as a foreign main proceeding was appropriate. Judge Glenn concluded that it was, noting that there were no objections to recognition and that the only open question was the location of MLC's COMI. 

The bankruptcy court determined that MLC's COMI was in the Caymans. According to Judge Glenn, findings supporting that conclusion included:

·    Recognition was consistent with creditor expectations. The Old Noteholders understood that MLC was a Cayman company, expected that that its debts would be restructured under Cayman law if a restructuring became necessary, and overwhelmingly voted to support the scheme.

•   MLC's pre-scheme and restructuring activities supported a finding of COMI in the Caymans. Among other things, MLC publicly identified itself as a Cayman company, nearly half of its direct wholly owned subsidiaries were Cayman entities, MLC maintained its registered office and statutory registers in the Caymans, and MLC disclosed in the documentation of the Old Notes that any restructuring would take place in the Caymans. In addition, on the chapter 15 petition date, restructuring activities were MLC's primary business activity, and the vast majority of restructuring activities took place in the Caymans.

•   None of the Old Noteholders objected to MLC's COMI as being located in the Caymans, and Old Noteholders holding more than half a billion dollars in Old Notes were domiciled in the Caymans and had urged MLC to restructure in the Caymans as "the most logical restructuring venue."

•   Although the Old Notes were governed by New York law, Cayman law would apply to most disputes over corporate actions arising in connection with the Cayman proceeding. Other MLC debt governed by Hong Kong law, which might indicate a COMI in China, was not being restructured as part of MLC's scheme.

•   Unlike in cases involving bad-faith COMI manipulation, MLC sought chapter 15 recognition in good faith.

The bankruptcy court separately determined that the Cayman proceeding was not a foreign nonmain proceeding. In reaching this conclusion, it determined that such recognition would be inconsistent with the goals of foreign nonmain proceedings, and that, because Modern Land did not engage in any non-transitory economic activity in the Caymans, it did not impact the local Cayman marketplace.

Outlook

Modern Land is a significant ruling for at least two reasons. First, the bankruptcy court dispelled the notion that, unlike Commonwealth jurisdictions following the Gibbs Rule, U.S. courts will, under appropriate circumstances and as a matter of comity in accordance with chapter 15, enforce the terms of a foreign court-sanctioned restructuring plan that modifies or cancels U.S. law-governed debt. With such a definitive ruling from a prominent U.S. bankruptcy judge, borrowers and lenders in certain circumstances may look to restructure under a scheme in the United Kingdom, the Netherlands, or Singapore and utilize a chapter 15 proceeding to implement the restructuring in the United States. Arguably, in at least certain contexts, such a restructuring should be just as effective as a chapter 11 case. 

Second, the decision reinforces the principle that a foreign debtor's COMI should be determined as of the chapter 15 petition date. As such, the fact that COMI may have migrated from one jurisdiction to another at some time prior to the chapter 15 petition date is not necessarily indicative of abuse or bad faith.