Chapter 15 of the Bankruptcy Code provides a valuable tool for non-US entities going through foreign insolvency proceedings when they have assets located in the United States. Chapter 15 can protect the value of US assets by granting a stay of actions against those assets during the concurrent administration of a complementary US insolvency process with that of the original foreign insolvency proceeding.
Recognition is the cornerstone of a Chapter 15 bankruptcy proceeding. It enables a foreign representative of the foreign debtor to seek assistance from US courts in administering the debtor's assets located within the United States. Chapter 15 provides for two types of foreign proceedings: (i) a foreign main proceeding, which is a foreign proceeding pending in a country where the debtor has its center of main interests (COMI); and (ii) a foreign nonmain proceeding, which is a foreign proceeding pending in a country where the debtor has an “establishment” (in other words, a place of operations). The distinction between the two is arguably significant because recognition as a foreign main proceeding automatically grants protections provided by the Bankruptcy Code, like the automatic stay, while a nonmain proceeding does not.
Determining a corporate entity’s COMI is a fact intensive exercise and courts will consider several factors, including the debtor’s nerve center and the location of its operations and/or assets. This analysis can become more difficult for a debtor that is part of a larger organizational structure because the debtor’s operations, assets, or affairs may be commingled with other non-debtor entities. While courts have shown creativity and flexibility in determining an entity’s COMI, courts often rely on the guiding principle that a debtor’s COMI is “where the debtor conducts its regular business, so that the place is ascertainable by third parties.” In re Ascot Fund Ltd., 603 B.R. 271 (Bankr. S.D.N.Y. 2019). It is also generally presumed that a corporate debtor’s COMI is its place of incorporation. 11 U.S.C. § 1516(c); see also H.R. Rep. No. 109-31, 109th Cong., 1st Sess. 113 (2005) (noting that “registered office” refers to the place of incorporation or the equivalent for an entity that is not a natural person).
However, a court’s taste for creativity does have limits—a lesson recently learned by Black Press Ltd. and its subsidiaries in their Chapter 15 proceedings pending in the Delaware Bankruptcy Court. Black Press is a Canadian headquartered media company that owns and operates subsidiaries across Canada and the US. Due to increasing financial pressures resulting from consumers turning away from print media, Black Press and its subsidiaries (Debtors) initiated insolvency proceedings in Canada under the Companies’ Creditors Arrangement Act. The Debtors then sought recognition of those proceedings as foreign main proceedings in the US, which, if granted, would automatically trigger the protection of the automatic stay.
The Debtors’ largest creditor is the Pension Benefit Guaranty Corp. (PBGC), which holds a claim of approximately $44 million for unfunded pension obligations. The PBGC objected to the Debtors’ requests for recognition as foreign main proceedings, but only with respect to the US entities. The PBGC argued that the US entities’ COMI could not be in Canada because they each were incorporated in the US, operated newspapers and websites within the US, and had their own on-site publisher and operations within their limited coverage areas inside the US.
In support of their request, the Debtors argued that the US entities were closely tied to the larger Canadian operations, that the Canadian-based leadership exercised authority over the US entities, and that the US entities guaranteed the secured debt of the Canadian parent company that was issued by Canadian banks. The Debtors also argued that the failure to grant recognition as foreign main proceedings would hinder a sale of the Debtors’ businesses and assets that was being pursued in the Canadian proceedings.
Ultimately, the court was not persuaded by the Debtors’ arguments. The court found that the Debtors could not overcome the presumption that companies incorporated and actually operating in the US have a COMI in the US. Notably, the court also stated that the Debtors had even failed to show that the US entities were entitled to recognition as foreign nonmain proceedings.
The lesson to be learned from Black Press is that, while courts have taken creative and flexible approaches to determine COMI in a way to permit recognition of foreign proceedings, the hurdle for entities incorporated and operating in the US is likely great enough to preclude the use of Chapter 15 for those entities. In such a situation, consideration of a parallel Chapter 11 filing is advised.
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