Cayman Islands Branch of FDIC-Insured U.S. Bank Ineligible for Chapter 15 Relief
The Bankruptcy Code bars certain individuals or entities from filing for bankruptcy protection, generally because they do not reside or have a place of business or property in the United States, fail to satisfy certain debt thresholds, or are business entities, such as banks and insurance companies, subject to non-bankruptcy rules or regulations governing their rehabilitation or liquidation. Thus, the Bankruptcy Code sets forth eligibility requirements for bankruptcy relief under chapter 7 (liquidations), chapter 9 (municipal debt adjustments), chapter 11 (reorganizations), chapter 12 (family farmer bankruptcies), and chapter 13 (wage earner bankruptcies). It also contains specific eligibility requirements for relief under chapter 15, which was enacted in 2005 and provides for U.S. bankruptcy court "recognition" of foreign bankruptcy proceedings.
Because chapter 15 was designed to provide a mechanism for U.S. court assistance to foreign bankruptcy courts or functionaries presiding over or administering bankruptcy proceedings involving non-U.S. debtors, its eligibility requirements differ in certain significant respects from the requirements for debtor eligibility under other chapters of the Bankruptcy Code. In In re Silicon Valley Bank (Cayman Islands Branch) (in Official Liquidation), 2024 WL 734735 (Bankr. S.D.N.Y. Feb. 22, 2024) ("SVB Caymans"), the U.S. Bankruptcy Court for the Southern District of New York examined chapter 15 eligibility in ruling on a petition for chapter 15 recognition of a Cayman Islands (the "Caymans") liquidation proceeding filed with respect to the Caymans branch of a failed U.S. bank.
The court denied the petition for chapter 15 recognition, ruling that the branch bank was not eligible for chapter 15 relief because "[i]t possessed no separate legal existence outside of the [U.S. bank], which was indisputably U.S.-incorporated and ineligible for bankruptcy relief … as a domestic [Federal Deposit Insurance Corporation ("FDIC")]-insured bank." The court also held that the U.S. bank's closure and the commencement of an FDIC receivership for it did not result in the "transmogrification" of the U.S. bank or the branch bank into an entity eligible for bankruptcy.
Eligibility for Bankruptcy Filing
Section 101 of the Bankruptcy Code includes a definition of the term "debtor," and section 109 limits the entities that can qualify as a debtor. Section 101(13) provides that "debtor" means "person or municipality concerning which a case under this title has been commenced." Section 101(41) of the Bankruptcy Code defines the term "person" to include an "individual," a "partnership," and a "corporation," but to exclude a "governmental unit," with certain exceptions.
Section 109(a) states that, "[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title."
Section 109(b) bars certain entities from being a chapter 7 debtor, including railroads, certain domestic and foreign insurance companies, and certain banks. Specifically, section 109(b)(2) provides in relevant part that a "person" may be a debtor under chapter 7 only if such person is not:
[A] domestic insurance company, bank, savings bank, cooperative bank, … or industrial or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act, except that an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 1 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at the direction of the Board of Governors of the Federal Reserve System.
11 U.S.C. § 109(b)(2) (emphasis added).
Section 3(h) of the Federal Deposit Insurance Act (the "FDIA") defines an "insured bank" as "any bank (including a foreign bank having an insured branch) the deposits of which are insured in accordance with the provisions of the [FDIA]." 12 U.S.C. § 1813(h).
Section 109(b)(3) of the Bankruptcy Code also excludes from chapter 7 eligibility "a foreign bank, savings bank, [or] cooperative bank … that has a branch or agency (as defined in section 1(b) of the International Banking Act of 1978) in the United States."
The entities specified in sections 109(b)(2) and (b)(3), which are also ineligible for chapter 11 relief pursuant to section 109(d), are generally regulated by other rehabilitation or liquidation rules. Collier on Bankruptcy ("Collier") ¶ 109.03[3][b] (16th ed. 2024).
Special Rules for Chapter 15 Eligibility
Chapter 15 of the Bankruptcy Code has its own eligibility requirements. 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, which has been enacted in some form by nearly 60 nations or territories.
Under section 1515, the "foreign representative" of a foreign "debtor" may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding."
Section 1502 provides that "for the purposes of [chapter 15] … 'debtor' means an entity that is the subject of a foreign proceeding."
Section 1501(c) provides that "[t]his chapter does not apply to … a proceeding concerning an entity, other than a foreign insurance company, identified by exclusion in section 109(b)."
Section 109(b) and the other provisions in chapter 1 of the Bankruptcy Code "apply in a case under chapter 15" pursuant to section 103(a).
The language making section 109 applicable in chapter 15 cases has led to a disagreement among the courts as to whether a chapter 15 debtor must satisfy the eligibility requirements of both chapter 15 and section 109, particularly section 109(a)'s requirement that a debtor reside, have a domicile, a place of business, or property in the United States. Compare Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013) (rejecting the argument that a chapter 15 debtor need satisfy only the chapter 15-specific definition of "debtor" in section 1502(1) and ruling that the section 109(a) applies in chapter 15 cases as well as cases filed under other chapters); In re Agro Santino, OOD, 653 B.R. 79 (Bankr. S.D.N.Y. 2023) (same); In re Forge Grp. Power Pty Ltd., 2018 WL 827913, at *13 (N.D. Cal. Feb. 12, 2018) (vacating a bankruptcy court order denying chapter 15 recognition on the basis of Barnet, but noting that "the debtor eligibility requirements of 11 U.S.C. § 109(a) apply in Chapter 15 cases"), with In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024) (distancing itself from Barnet based on Eleventh Circuit precedent pre-dating the enactment of chapter 15, and holding that chapter 15 has its own eligibility requirements, and that the eligibility requirements for debtors in cases under other chapters of the Bankruptcy Code do not apply in chapter 15 cases); see also Collier at ¶ 1501.03[3] ("Chapter 15 nowhere indicates that debtors in foreign proceedings must meet the section 109(a) criteria that apply to 'a debtor under this title' or that foreign proceedings involving debtors who do not meet those criteria cannot be recognized.").
Relatively few published court rulings have examined whether an entity, "other than a foreign insurance company, identified by exclusion in section 109(b)," is ineligible for chapter 15 relief under section 1501(c). See, e.g., In re Irish Bank Resol. Corp. Ltd., 538 B.R. 692, 696 (D. Del. 2015) (a foreign bank whose representative offices in the United States had all been closed more than 10 months before the chapter 15 petition date was not ineligible for chapter 15 relief as a foreign bank that had a branch or agency in the United States ; the relevant time period to consider in assessing whether the bank qualified for protection under chapter 15 was the chapter 15 petition date, not bank's entire operational history); In re Tri-Cont'l Exch. Ltd., 349 B.R. 627, 632 (Bankr. E.D. Cal. 2006) ("The status of a debtor in this case as a foreign insurance company that is ineligible to be a debtor under the Bankruptcy Code by virtue of 11 U.S.C. § 109(b)(3) does not affect the availability of chapter 15 relief. Foreign insurance companies are eligible for chapter 15 relief because § 1501(c)(1) provides that chapter 15 does not apply to "a proceeding concerning an entity, other than a foreign insurance company, identified by exclusion in section 109(b)." 11 U.S.C. § 1501(c)(1).").
SVB Caymans
Silicon Valley Bank ("SVB") was a California-incorporated, FDIC-insured bank that acted as a key lender to the technology industry. Following a run on approximately $40 billion in customer deposits, SVB was placed into FDIC receivership on March 10, 2013. SVB's parent company filed for chapter 11 protection one week later. First Citizens Bank & Trust Company ("First Citizens") later purchased SVB's assets at a steep discount.
At the time it failed, SVB had a branch in the Caymans (the "Caymans branch"). The Caymans branch was not separately incorporated but was licensed to operate in the Caymans. The Caymans branch held $866 million in customer deposits in three types of deposit accounts, including "sweep accounts." The account agreements for all of the customer accounts explicitly stated that the accounts were not FDIC-insured. Deposits in the sweep accounts were periodically swept into parallel deposit accounts automatically opened for the customers in SVB's California office.
The Caymans branch was not part of the receivership or the First Citizens asset sale. However, many of the Caymans branch customers filed claims in SVB's FDIC receivership. The FDIC determined that deposits in the sweep accounts would be fully covered by FDIC insurance (even in excess of the ordinary $250,000 limitation after the FDIC invoked the "systemic risk exception"), but denied without any explanation insurance coverage for deposits in other Caymans branch accounts (i.e., money market and operating accounts). Instead, depositors in these accounts were allowed unsecured claims against SVB that would be paid only after all insured claims were paid in full.
Because it was unlikely that unsecured creditors would receive any recovery in the FDIC receivership, certain Caymans branch depositors filed a winding-up proceeding (the "Caymans proceeding") for the Caymans branch in June 2023 under the Cayman Islands Companies Act in the Financial Services Division of Grand Court of the Cayman Islands (the "Caymans court"). The Caymans court granted the application and appointed joint official liquidators. As the foreign representatives for the Caymans branch, the liquidators filed a petition on January 18, 2024, in the U.S. Bankruptcy Court for the Southern District of New York (the "bankruptcy court") seeking recognition of the Caymans proceeding under chapter 15 as a foreign main proceeding.
Pending resolution of the chapter 15 petition, the liquidators sought provisional relief in the form of discovery regarding the receivership (and the books and records of the Caymans branch, which were located in the United States) from the FDIC, which had denied a claim filed by the liquidators on behalf of the Caymans branch. The bankruptcy court scheduled a consolidated hearing to consider both the recognition and discovery requests.
The FDIC opposed both requests for relief. It argued, among other things, that a bankruptcy court cannot order discovery from the FDIC in accordance with the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). The FDIC also argued that the Caymans branch was not eligible for chapter 15 relief because it was not separately incorporated, but merely a branch of SVB, a California-incorporated bank in FDIC receivership that is itself ineligible to be a debtor under section 109(b)(2) of the Bankruptcy Code as an FDIC-insured domestic bank. The FDIC also maintained that the bankruptcy court lacked subject-matter jurisdiction to grant chapter 15 recognition because FIRREA establishes a "comprehensive, mandatory claims process" and does not allow judicial oversight of an FDIC receivership.
The Bankruptcy Court's Ruling
The bankruptcy court denied the chapter 15 recognition petition and the liquidators' request for provisional relief.
Initially, Chief U.S. Bankruptcy Judge Martin Glenn explained that section 109(b) "indisputably applies" to SVB, "making [SVB] ineligible to file a bankruptcy case under Chapter 7 or 11" as well as a case under chapter 15 because section 109(b) also applies in chapter 15 cases. SVB Caymans, 2024 WL 734735, at *3 (citing Barnet, 737 F.3d at 249-50). "That result," Judge Glenn wrote, "is not changed because [SVB] closed and ceased any ongoing business in California or the Caymans Islands." Id.
Judge Glenn also noted that, pursuant to section 1501(c) of the Bankruptcy Code, "Chapter 15 does not apply to entities that are ineligible for relief under section 109(b)." Id. at *10 (citing Collier at ¶ 1501.05). Read together, the bankruptcy court reasoned, the language of sections 109(b)(2) and 109(b)(3) dictates that "'foreign representatives of foreign banks which are subject to foreign proceedings will not be eligible for Chapter 15 recognition if the foreign banks have a branch or agency in the United States.'" Id. (quoting Collier at ¶ 1501.05).
Next, the bankruptcy court ruled that the Caymans branch was not eligible to be a debtor under chapter 15 because it was not a separate business or legal entity, but merely a branch of SVB, which was also ineligible to be a chapter 15 debtor.
Judge Glenn explained that: (i) the liquidators acknowledged that the Caymans branch was not a separate legal entity from SVB; (ii) the Caymans branch had no employees and relied on SVB's California office for staffing needs for "shared" finance, IT, legal, and risk management services; (iii) the agreement governing the relationship between SVB and the Caymans branch stated that it was an "intra-entity agreement and therefore has no formal legal basis"; and (iv) all transfers among SVB, the Cayman branch, and their depositors were done electronically. Accordingly, Judge Glenn wrote, "the [liquidators] have not shown that [the Caymans branch] possessed anything more than a mail-drop presence in the Cayman Islands." Id. at *12.
Because it ruled that the Caymans branch was ineligible for chapter 15 relief under section 109(b)(2) of the Bankruptcy Code, the bankruptcy court declined to address whether the Caymans branch satisfied the eligibility requirements in section 109(a).
According to Judge Glenn, the liquidators were not left without recourse because section 1509(f) of the Bankruptcy Code provides that the failure of a foreign representative to obtain chapter 15 recognition "does not affect any right the foreign representative may have to sue in the United States to collect or recover a claim which is property of the estate." Thus, he noted, even without chapter 15 recognition, the liquidators could sue to collect on the claims of the Caymans branch (and seek discovery) in another U.S. court and, as noted below, acknowledged the open question regarding whether comity applies or whether chapter 15 recognition is required to recognize foreign judgments in insolvency proceedings.
Having concluded that the Caymans branch was not eligible for chapter 15 relief, the bankruptcy court denied the liquidators' request for provisional relief and dismissed the chapter 15 petition.
Outlook
Like other chapters of the Bankruptcy Code, chapter 15 includes specific eligibility requirements for debtors. One of those is that an entity that cannot be a debtor under chapter 7 of the Bankruptcy Code, other than a foreign insurance company, is ineligible for chapter 15 relief. Ineligible entities include both domestic FDIC-insured banks and foreign banks with U.S. branches. Because the foreign debtor in SVB Caymans did not have a separate legal existence from a domestic FDIC-insured bank, the bankruptcy court found that it fell into the category of entities ineligible for chapter 15 relief. In so ruling, the court joined certain, principally Second Circuit, courts that have concluded that the debtor eligibility requirements set forth in section 109 of the Bankruptcy Code apply in chapter 15 cases. As noted earlier, however, the Eleventh Circuit in Al Zawawi diverged from the Second Circuit and determined that compliance with the criteria of section 109(a) is not required to access chapter 15.
Interestingly, after the bankruptcy court explained that denial of the chapter 15 petition did not preclude the liquidators from seeking to collect on claims in other U.S. courts, the bankruptcy court noted in dicta that it is an unsettled question "whether comity applies to allow courts to recognize foreign judgments in insolvency cases absent Chapter 15 recognition." Id. at *13 n.7. The court then cited cases in which non-bankruptcy courts in the United States have granted "adjudicatory comity" to the orders or judgments of foreign courts in the absence of chapter 15 recognition.
U.S. courts have a long history of recognizing and enforcing foreign court orders issued in both bankruptcy and non-bankruptcy proceedings as a matter of international comity (both before and after the enactment of chapter 15). However, a U.S. bankruptcy court that has denied a petition for chapter 15 recognition has the power under section 1509(d) of the Bankruptcy Code to "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States." Thus, if the bankruptcy court denying chapter 15 recognition exercises its discretion under section 1509(d), a foreign representative's recourse would be limited to filing litigation in a U.S. court solely for the purpose of collecting or recovering on a foreign debtor's claim.
The day after the bankruptcy court denied the petition for chapter 15 recognition in SVB Caymans, the liquidators sued the FDIC in the U.S. District Court for the District of Columbia alleging that the FDIC's denial in the receivership of the claims based on the Caymans branch accounts without explanation was arbitrary and unlawful. See Ledwidge et al., as Joint Official Liquidators of Silicon Valley Bank (Cayman Islands Branch) (In Official Liquidation) v. Federal Deposit Insur. Corp., No. 1:24-cv-00513 (D.D.C. Feb. 24, 2024). In their complaint, the liquidators seek a declaratory judgment allowing the claims as well as an award of compensatory and punitive damages.
