U.S. Bankruptcy Court Directs Turnover of Chapter 15 Debtor's Assets for Administration in Foreign Bankruptcy Proceeding
Nearing its 20th anniversary, chapter 15 of the Bankruptcy Code is an invaluable framework for coordinating cross-border bankruptcy cases involving foreign debtors that have assets located in the United States. It includes a host of provisions empowering a U.S. bankruptcy court to provide assistance to a foreign bankruptcy court or its representatives under the principle of international comity. One form of assistance—turnover of a foreign debtor's U.S. assets for administration in its "recognized" bankruptcy or restructuring proceeding—was the subject of a ruling handed down by the U.S. Bankruptcy Court for the Southern District of New York. In In re ECM Straits Fund I, LP, 2024 WL 4712995 (Bankr. S.D.N.Y. Nov. 7, 2024), the bankruptcy court approved a settlement between chapter 15 debtors' foreign representatives and an entity that nominally held stock owned by the debtors whereby the stock would be transferred to the foreign representatives for administration in the debtors' Cayman Islands liquidation proceeding.
Procedures, Recognition, and Relief 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).
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."
"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). An establishment is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."
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).
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 grant "any appropriate relief," including a stay of any action against the debtor or its U.S. assets not covered by the automatic stay, an order suspending the debtor's right to transfer or encumber its U.S. assets, and "any additional relief that may be available to a trustee," with certain exceptions.
Under section 1521(b), the court may "at the request of the foreign representative,
entrust the distribution of all or part of the debtor's assets located in the United States to the foreign representative or another person, including an examiner, authorized by the court, provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected."
Section 1522(a) provides that the bankruptcy court may exercise its discretion to order the relief authorized by section 1519 (authorizing certain pre-recognition relief) or section 1521 "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
"Sufficient protection" with the meaning of section 1521(b) has three elements: (i) just treatment of all creditors; (ii) protection of U.S. creditors against prejudice and inconvenience arising from having to assert their claims in the foreign proceeding; and (iii) distribution of the assets of the foreign debtor's estate in accordance with the priorities established under U.S. law. See In re Markus, 610 B.R. 64, 76 (Bankr. S.D.N.Y. 2019), aff'd 620 B.R. 31 (S.D.N.Y. 2020) (citing In re Atlas Shipping A/S, 404 B.R. 726 (Bankr. S.D.N.Y. 2009)); see also In re ENNIA Caribe Holding N.V., 596 B.R. 316, 322 (Bankr. S.D.N.Y. 2019) (noting that a determination of sufficient protection "requires a balancing of the respective parties' interests").
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. See 11 U.S.C. § 1507(b).
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."
ECM Straits
Cayman Islands exempted limited partnership ECM Straits Fund I, LP ("ECM") provided venture capital to technology-enabled growth companies located primarily in the United States, Malaysia, Indonesia, and Turkey. ECM held direct or indirect investments in 12 portfolio companies, including ZeeMee, Inc. and predecessors-in-interest of Phenom People, Inc. ("Phenom"). ECM made many of its investments through its wholly owned subsidiary TransAsia E-Commerce Inc. ("TEC," and together with ECM, the "debtors").
The debtors also held investments directly or indirectly in a series of private investment funds (the "KludeIn Funds") and Elixir America Holdings, Inc. ("Elixir"), a Delaware corporation that nominally held membership interests in the KludeIn Funds. Elixir, however, ceased to exist in 2021 because it failed to pay Delaware franchise taxes.
For reasons that were unclear based on the debtors' books and records, the ZeeMee and Phenom stock (the "Stock") was registered as being owned by the KludeIn Funds and Elixir rather than the debtors, even though the debtors funds were used to acquire the Stock.
In 2022, the debtors were placed into liquidation proceedings in the Caymans (the "Cayman Proceedings"). In December 2023, the debtors' Cayman court-appointed liquidators (as the debtors' foreign representatives (the "FRs")) filed petitions in the U.S. Bankruptcy Court for the Southern District of New York seeking chapter 15 recognition of the Cayman Proceedings. The bankruptcy court granted the petitions on January 30, 2024, recognizing the Cayman Proceedings as foreign main proceedings.
The FRs claimed that the Stock rightfully belonged to the debtors and should be turned over by the KludeIn Funds, Elixir, or their affiliates to be administered in the Cayman Proceedings. As Elixir ceased to exist in 2021, the FRs negotiated a settlement with the KludeIn Funds whereby the funds agreed to transfer the Stock to the debtors in exchange for a release.
The FRs sought bankruptcy court approval of the settlement under Rule 9019(a) of the Federal Rules of Bankruptcy Procedure as well as an order pursuant to section 1521(b) of the Bankruptcy Code entrusting the Stock to the FRs. According to the FRs, the proposed settlement fell "well within the range of reasonableness," and relief under section 1521(b): (i) was warranted because the Cayman Proceedings provided a forum for all of the debtors' creditors, regardless of their domicile, to submit claims and be heard; and (ii) was a natural extension of the bankruptcy court's order recognizing the Cayman Proceedings as foreign main proceedings. The motion was unopposed.
The Bankruptcy Court's Ruling
The bankruptcy court approved the settlement and ordered that the Stock be turned over to the FRs for administration in the Cayman Proceedings.
Initially, U.S. Bankruptcy Judge Martin Glenn concluded that the proposed settlement between the FRs and the KludeIn Funds should be approved as being "fair and equitable and in the best interests of the [debtors'] estate" according to the factors articulated by the U.S. Court of Appeals for the Second Circuit in In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007). Among other things, the bankruptcy court found that: (i) the FRs demonstrated a possibility of success on the merits of turnover litigation under section 542(b) of the Bankruptcy Code (made applicable in chapter 15 cases in the court's discretion pursuant to section 1521(a)(7)) on the basis that the KludeIn Funds held the Stock in constructive trust for the debtors; (ii) litigation over ownership of the Stock could be costly, thereby rendering the settlement the "only reasonable" means of resolution; (iii) the paramount of interests of creditors were best served by the settlement, which was likely to "conserve estate assets and maximize value for creditors"; (iv) no parties objected to the proposed settlement; (v) the parties were represented by informed, experienced counsel, and it was undisputed that the court reviewing the settlement was experienced and knowledgeable; (vi) the scope of the releases included in the proposed settlement was appropriate; and (vii) the settlement was the product of arm's-length bargaining. ECM Straits, 2024 WL 4712995, at **5–8.
Judge Glenn also determined that relief under section 1521(b) was appropriate because creditors were "sufficiently protected." He explained that the FRs intended to distribute the Stock or its proceeds in the Cayman Proceedings, and although the debtors had no known U.S. creditors, the Cayman Proceeding offered a forum for all of the debtors' foreign creditors to submit claims.
Outlook
Chapter 15 of the Bankruptcy Code and the Model Law on which it is patterned are premised on the principle of comity, a concept that figures prominently (and expressly) in many of the provisions of both legal frameworks. This means that, under the principle of "adjudicative" comity, the role of a U.S. bankruptcy court in cross-border bankruptcy cases under chapter 15 is to provide assistance to a foreign bankruptcy court presiding over a foreign debtor's reorganization or bankruptcy case as well as the court-appointed representatives of the debtor. That assistance can include injunctive relief to prevent creditors from proceeding against the foreign debtor's assets or, as illustrated by ECM Straits, an order of a U.S. bankruptcy court directing turnover of the foreign debtor's U.S. assets to a foreign representative so that the assets can be administered in the foreign debtor's bankruptcy or reorganization case abroad.
The significance of the ruling in ECM Straits lies principally in its focus on the role of a U.S. bankruptcy court as a facilitator—almost akin to an adjunct of the foreign bankruptcy court—in a chapter 15 case. It also highlights the power of a U.S. court presiding over a chapter 15 case to approve compromises and settlements that promote the efficacy of the process.
Finally, ECM Straits illustrates that although chapter 15 relief is sometimes perceived to be limited to actions ancillary to a recognized foreign bankruptcy proceeding, a U.S. bankruptcy court has the power to grant relief—in this case, the approval of a settlement—that benefits the foreign debtor's estate even in the absence of equivalent or parallel relief in the foreign bankruptcy court.
