Delaware Bankruptcy Court: "Center of Main Interests" for Purposes of Chapter 15 Recognition Must Be Determined on Debtor-by-Debtor Rather than Enterprise Group Basis
Determining a foreign debtor's "center of main interests" ("COMI") for purposes of recognizing a foreign bankruptcy proceeding in the United States under chapter 15 of the Bankruptcy Code can be problematic in cases involving multiple debtors that are members of an enterprise group doing business in several different countries. The U.S. Bankruptcy Court for the District of Delaware recently addressed this issue in connection with a petition for chapter 15 recognition of an enterprise group's Canadian bankruptcy proceeding commenced on behalf of a Canadian parent company, its Canadian affiliates, and three subsidiaries incorporated and doing business in the United States.
In an unpublished bench ruling, the court denied the chapter 15 petition to the extent that it sought recognition of the Canadian proceeding as a "foreign main proceeding" with respect to the U.S. subsidiaries. See In re Black Press Ltd., No. 24-100044 (MFW) (Bankr. D. Del. Feb. 14, 2024) (unpublished order) (Doc. No. 73). It concluded that in a case involving multiple enterprise group debtors, the court must examine each debtor's COMI separately, rather than the enterprise group as a whole, for purposes of chapter 15 recognition. In so ruling, the court found, among other things, that the U.S. debtors' guarantee of their Canadian parent company's debts was an insufficient basis to conclude that the U.S. debtors' COMI was located in Canada, or that the U.S. debtors even maintained an "establishment" in Canada.
Recognition and Procedures 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 "foreign representative" of a non-U.S. 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 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).
The Bankruptcy Code does not define "habitual residence," but courts generally equate it with the concept of "domicile," which is established by "physical presence in a location coupled with an intent to remain there indefinitely." In re Ran, 607 F.3d 1017, 1022 (5th Cir. 2010) (citing factors to consider in determining habitual residence); accord In re Pirogova, 593 B.R. 402, 409 (Bankr. S.D.N.Y. 2018) (same); In re Kemsley, 489 B.R. 346, 353 (Bankr. S.D.N.Y. 2013).
Various factors have been deemed relevant by courts in determining a debtor's COMI, including the location of each debtor entity'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 each debtor entity's "nerve center," including the location from which such entity'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 Pirogova, 593 B.R. at 410; 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.
In cases involving multiple foreign debtors, COMI must be determined on an entity-by-entity basis. See Serviços, 600 B.R. at 244 ("While the Constellation Group is discussed as a group entity at times throughout this opinion's opening sections for context, it is important to bear in mind that the Court's recognition is granted on an individual debtor by debtor basis."); In re OAS S.A., 533 B.R. 83, 92 n.8 (Bankr. S.D.N.Y. 2015).
Recognition under chapter 15 "is not to be rubber stamped by the courts," and the bankruptcy court must carefully examine whether a foreign bankruptcy or insolvency proceeding qualifies as either a main or a nonmain proceeding under chapter 15. See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 125 (Bankr. S.D.N.Y. 2007), aff'd, 389 B.R. 325 (S.D.N.Y. 2008); accord In re Glob. Cord Blood Corp., 2022 WL 17478530, at *6 (Bankr. S.D.N.Y. Dec. 5, 2022) ("'But recognition is not a rubber stamp exercise,' and the burden rests on the foreign representative to prove each of the requirements of Section 1517.") (quoting Creative Finance, 543 B.R. at 514).
Section 1509(b) provides that if a U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief, and a U.S. court "shall grant comity or cooperation to the foreign representative." If, however, a U.S. bankruptcy court denies a petition for recognition of a foreign proceeding, section 1509(d) authorizes the court to "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation" from other U.S. courts. Still, a foreign representative's failure to commence a chapter 15 case or to obtain recognition does not prevent the foreign representative from suing in a U.S. court "to collect or recover a claim which is the property of the debtor." 11 U.S.C. § 1509(f).
Pending its decision on a petition for recognition, the bankruptcy court is empowered to grant certain kinds of provisional relief. Section 1519(a) authorizes the court, "where relief is urgently needed to protect the assets of the debtor or the interests of the creditors," to stay any execution against the debtor's assets, entrust the administration of the debtor's assets to a foreign representative, or suspend the right to transfer, encumber, or otherwise dispose of any of the debtor's assets. Any provisional relief granted pending approval of a request for recognition terminates at such time that the bankruptcy court rules on the recognition request, unless the court expressly orders otherwise. See 11 U.S.C. § 1519(b).
Upon recognition of a foreign "main" proceeding, section 1520(a) of the Bankruptcy Code provides that certain provisions of the Bankruptcy Code automatically come into force, including: (i) the automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets (section 362, subject to certain enumerated exceptions); (ii) the right of any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest (section 361); and (iii) restrictions on use, sale, lease, transfer, or encumbrance of the debtor's U.S. assets (sections 363, 549, and 552).
Section 1520(a)(3) gives a foreign representative in a recognized chapter 15 case the power to operate the debtor's business and to exercise the rights and powers of a bankruptcy trustee under sections 363 (governing the use, sale, or lease of estate property) and 552 (governing the enforceability of prepetition liens on property acquired by the estate or the debtor postpetition).
Pursuant to sections 1520(c) and 1528, the foreign representative can also commence a full-fledged bankruptcy case under any other chapter of the Bankruptcy Code as long as the foreign debtor is eligible to file for bankruptcy in the United States under that chapter. The foreign representative may intervene in any court proceedings in the United States in which the foreign debtor is a party (section 1524) and can sue and be sued in the United States on the foreign debtor's behalf (section 1509(b)(1)).
Section 1507(a) of the Bankruptcy Code provides that, upon recognition of a main or nonmain proceeding, the bankruptcy court may provide "additional assistance" to a foreign representative "under [the Bankruptcy Code] or under other laws of the United States." However, the court must consider whether any such assistance, "consistent with principles of comity," will reasonably ensure that: (i) all stakeholders are treated fairly; (ii) U.S. creditors are not prejudiced or inconvenienced by asserting their claims in the foreign proceeding; (iii) the debtor's assets are not preferentially or fraudulently transferred; (iv) proceeds of the debtor's assets are distributed substantially in accordance with the order prescribed by the Bankruptcy Code; and (v) if appropriate, an individual foreign debtor is given the opportunity for a fresh start.
Following recognition of a foreign main or nonmain proceeding, section 1521(a) provides that, to the extent not already in effect, and "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," the bankruptcy court may also "grant[] any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)." These provisions authorize a bankruptcy trustee to, among other things, avoid and recover transfers that are fraudulent under the Bankruptcy Code. However, these avoidance powers are available to a foreign representative only if the debtor commences a proceeding under another chapter of the Bankruptcy Code.
Under section 1521(b), the court may entrust the distribution of the debtor's U.S. assets to the foreign representative or another person, provided the court is satisfied that the interests of U.S. creditors are "sufficiently protected."
Section 1522(a) provides that the bankruptcy court may exercise its discretion to order the relief authorized by sections 1519 and 1521 upon the commencement of a case for recognition of a foreign proceeding "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
Section 1523 authorizes the bankruptcy court to order relief necessary to avoid acts that are "detrimental to creditors," providing that upon recognition of a foreign proceeding, a foreign representative has "standing in a case concerning the debtor under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)."
Section 1506 of the Bankruptcy Code sets forth a general public policy exception to any relief requested by a foreign representative in chapter 15: "[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 U.S." The exception is rarely invoked, difficult to satisfy, and narrowly construed. See In re Vitro S.A.B. de CV, 701 F.3d 1031, 1069 (5th Cir. 2012); In re Black Gold S.A.R.L., 635 B.R. 517, 528 (B.A.P. 9th Cir. 2022).
Black Press
Fifty-year-old Black Press Group Ltd. (the "BP Group") is a Canadian commercial printer and newspaper publisher headquartered in Surrey, British Columbia. Its Canadian subsidiaries include Black Press Ltd. ("BPL"), a company headquartered in Vancouver, as well as The Beacon Journal Publishing Co. ("Beacon Journal"), Sound Publishing Holdings Inc. ("SP Holdings"), San Francisco Print Media Co., Central Web Offset Ltd., 0922015 B.C. Ltd., and WWA (BPH) Publications (together with the BP Group, collectively, the "Canadian debtors"). The BP Group also operates in the United States under three U.S. incorporated subsidiaries—Sound Publishing, Inc., Sound Publishing Properties, Inc., and Oahu Publications, Inc. (collectively, the "U.S. debtors")—that conduct business in Hawaii, Alaska, and Washington. The BG Group has more than 700 employees in Canada and approximately 500 employees in the United States.
The U.S. debtors guaranteed the BP Group's funded debt, which was issued in Canada.
BP Group subsidiary SP Holdings acquired Beacon Journal, which publishes the Akron Beacon Journal in Ohio and operates Ohio.com, in 2006. Beacon Journal sponsored a defined benefit pension plan for its employees governed by the Employee Retirement Income Security Act ("ERISA"). In September 2021, Beacon Journal and the Pension Benefit Guaranty Corp. (the "PBGC") reached an agreement terminating the pension plan. Under ERISA, the joint and several liability borne by Beacon Journal and each member of its controlled group (including the BP Group) amounts to approximately $47 million.
The BP Group's financial condition steadily deteriorated with the expansion of online news and advertising platforms, particularly during the COVID-19 pandemic. In 2023, ongoing liquidity problems led the group to seek investments in or a sale of the enterprise, but those efforts were unsuccessful.
Accordingly, on January 14, 2024, various BP Group companies (including the U.S. debtors) commenced reorganization proceedings in Canada (the "Canadian proceeding") under the Companies' Creditors Arrangement Act (the "CCAA") with the intention of obtaining financing and selling the enterprise as a going concern. The Canadian court presiding over the proceeding appointed BPL as the debtors' foreign representative.
Anticipating that creditors not subject to the Canadian court's jurisdiction (and the debt collection moratorium triggered by the initiation of the Canadian proceeding) might pursue the U.S. entities or their assets to collect on their debts, BPL filed a petition on January 15, 2024, in the U.S. Bankruptcy Court for the District of Delaware seeking recognition of the Canadian proceeding under chapter 15 of the Bankruptcy Code. The debtors covered by the petition included both the Canadian debtors and the U.S. debtors (collectively, the "debtors").
According to BPL, chapter 15 recognition of the Canadian proceeding as a foreign main proceeding was warranted because, among other things, the debtors' COMI and "nerve center" is located in Canada, where the BP Group is headquartered, has registered offices, and the location at which BP Group's corporate officers orchestrate business activities for the U.S. debtors. BPL also argued that: (i) the U.S. debtors' operations are functionally and operationally integrated with the BP Group such that the U.S. debtors cannot operate independently of the Canadian debtors and the key services provided by the BP Group; (ii) each of the debtors is party to the jointly administered Canadian proceeding; (iii) the Canadian court implicitly recognized the significance of the debtors' interests in Canada when it took jurisdiction over the debtors; and (iv) the "locus of the [debtors'] restructuring is in Canada."
In addition to chapter 15 recognition, BPL sought various forms of relief authorized under section 1507, 1520, and 1521 of the Bankruptcy Code for the purpose of, among other things, shielding the U.S. debtors and their assets from creditor collection efforts, restricting transfers of the debtors' U.S. assets, and authorizing BPL to operate the U.S. debtors' businesses. It also requested pre-recognition relief under section 1519 of the Bankruptcy Code, including an order enforcing the Canadian court's moratorium order and its order approving a "sales and solicitation process" for the BP Group, and authorizing the debtors to enter into a "debtor-in-possession" financing agreement under section 364 secured in part by liens upon the U.S. debtors' assets.
The bankruptcy court granted the pre-recognition relief in a January 16, 2024, order.
The PBGC objected in part to the petition for chapter 15 recognition. It argued that: (i) because the U.S. debtors' COMI was in the United States, the Canadian proceeding did not qualify as a "foreign main proceeding"; and (ii) recognition of the Canadian proceeding as a "foreign non-main proceeding" was unwarranted because BPL failed to request that relief or present any evidence that the U.S. debtors had an "establishment" in Canada.
The Bankruptcy Court's Ruling
The bankruptcy court granted the chapter 15 petition in part and denied it in part during a February 8, 2024, hearing memorialized in a February 14, 2024, order.
U.S. Bankruptcy Judge Mary Walrath ruled that BPL had satisfied all of the requirements for recognition of the Canadian proceeding as a foreign main proceeding under chapter 15 with respect to the Canadian debtors, but had not met that burden with respect to the U.S. debtors because the COMI of each of the U.S. debtors was located in the United States rather than Canada.
Initially, Judge Walrath emphasized that the Canadian court never held that the U.S. debtors' COMI was in Canada, nor was any such finding required under the CCAA. See Transcript of Record ("Tr.") at 14–16, In re Black Press Ltd., No. 24-100044 (MFW) (Bankr. D. Del. Feb. 13, 2024) (Doc. No. 71). Guided by the bankruptcy court's decision in Servicos, Judge Walrath concluded that, for the purpose of determining comity in a case involving multiple debtors, "the proper rule is … that each entity has to be viewed individually." Id. at p. 99.
In this case, Judge Walrath explained:
I would be hard pressed to find that a newspaper, local newspaper operating in the United States, has its center of main interest in Canada—where it is incorporated in the United States as well, has its center of main interest in Canada simply because, to cite the foreign representatives' evidence, it reports to the CEO and CFO at [BP Group]. [BP Group] handles its centralized administrative services, including oversight of finances, taxes, audit, insurance, and circulation and management systems and IT-type systems. All of the debtors have a publisher on site in the United States. They do their printing. They solicit ads. They service their customers. And they pay their vendors in the Unites States…. The fact that the U.S. debtors have guaranteed the funded debt, which was issued in Canada, to the Canadian holding Company, does not, I think, alone make it sufficient to overcome the presumption that companies incorporated and actually operating in the United States have a center of main interest in Canada. And while the foreign representative … argued that the U.S. debtors could not function without Canada because of this integration, I think it's clear that they could function independently…. And I think that concluding otherwise, concluding that a company incorporated and operating in the United States has a center of main interest simply because it is part of a larger group of subsidiaries that also operate independently but are held by a Canadian holding company really would be effectively piercing the corporate veil, and there's simply not enough evidence of that.
Id. at pp. 99–100.
Judge Walrath rejected BPL's argument that the U.S. debtors' COMI shifted from the United States to Canada because the debtors stated on their websites that they were held or owned by a Canadian company. In addition, she explained, even using the "nerve center" analysis, the court must consider the nerve center of the individual debtor subsidiaries, not the nerve center of the Canadian holding company BP Group. Id. at pp. 100–101.
Finally, Judge Walrath rebuffed BPL's request for additional briefing on whether the court should recognize the Canadian proceeding as a foreign non-main proceeding on the basis that the U.S. debtors had an "establishment" in Canada, noting that she was skeptical that BPL could convince the court that the U.S. debtors had any relationship sufficient to qualify as an establishment in Canada. Id. as 114. She also observed that the U.S. debtors' operation had little economic impact on the market in Canada, and she did not consider the U.S. debtors' guarantee of the BP Group debt to represent a "sufficient economic impact" for the purpose of demonstrating the existence of an establishment. Id. at 115.
Outlook
Given the ramifications of the court's ruling in Black Press denying chapter 15 recognition of the Canadian proceeding with respect to the U.S. debtors—i.e., inapplicability of the automatic stay and termination of any pre-recognition provisional relief granted under section 1519—Judge Walrath stayed the effectiveness of her bench ruling for one week to give BPL an opportunity to explore other means of shielding the U.S. debtors and their assets from creditor collection efforts. Those options could have included BPL filing cases for the U.S. debtors under chapter 11 of the Bankruptcy Code, in which case the automatic stay would preclude such actions. In her February 14, 2024, order, Judge Walrath extended the stay of creditor collection actions against the U.S. debtors granted under section 1519 to February 15, 2024. However, as of February 23, 2024, no bankruptcy cases had been filed on behalf of the U.S. debtors.
Key takeaways for Black Press include the following:
- In assessing a debtor's COMI for purposes of chapter 15 recognition in a case involving multiple debtors, a U.S. bankruptcy court must examine each debtor separately rather than an enterprise group as a whole.
- The fact that a debtor has guaranteed the debts of an affiliate subject to bankruptcy proceedings in another country is not a sufficient basis by itself to find that the guarantor-debtor's COMI is located in the country where the affiliate's bankruptcy proceedings are pending.
A U.S. bankruptcy court has the authority to grant a wide range of provisional relief and additional assistance to a foreign representative or a foreign court in a chapter 15 case, including authorization for financing akin to chapter 11 debtor-in-possession financing pursuant to section 364 of the Bankruptcy Code.
