Two recent cases out of the Third Circuit and the Southern District of New York highlight some of the developing formulas US courts are using when engaging with foreign debtors. In a case out of the Third Circuit, Vertiv v. Wayne Burt, the court expanded on factors to be considered when deciding whether international comity requires the dismissal of US civil claims that impact foreign insolvency proceedings. And in a recent chapter 15 case In re Sunac, the SDNY bankruptcy court evaluated the factor test used by the Second Circuit to determine where a foreign debtor’s center of main interests (“COMI”) lies, revealing that the most critical consideration in this analysis is the location where a foreign debtor conducts its primary business activities.
Vertiv v. Wayne Burt
This case involves a contract claim brought by a Delaware corporation, Vertiv, against the Singapore-based corporation Wayne Burt. Wayne Burt moved to dismiss the claim, arguing that the suit was parallel to a foreign insolvency proceeding it was undergoing in Singapore. Wayne Burt claimed that a US ruling would impact the rights of creditors and debtors in the ongoing foreign bankruptcy, and therefore the doctrine of international comity required dismissal of the complaint.
Under the rules of international comity, when the outcome of a civil case brought in a US court would impact the outcome of a parallel foreign bankruptcy proceeding, US courts must typically abstain from the matter. This doctrine is based in a policy of recognizing the authority of another country’s judicial system within its own territory. While the Third Circuit has previously ruled on the elements a court must consider when addressing application of international comity, it had been nearly three decades since that precedent has been decided. The court therefore felt that this case was an opportune moment to update its guidance on the matter.
Factor Test
The Vertiv court expanded upon the steps required to apply international comity. First, the party seeking adjudication must prove that the US civil action is “parallel” to the foreign bankruptcy proceeding. Next, the party must make a prima facie case for international comity. And lastly, the court must determine that the foreign bankruptcy proceeding is fair to parties and is compatible with US public policy.
A finding of parallelism as it relates to a foreign bankruptcy proceeding requires US courts to consider if (1) the foreign bankruptcy proceeding is ongoing in a duly authorized tribunal while the civil action is pending in US court, and (2) the outcome of the US civil action may affect the debtor’s estate. In essence, this is a consideration of whether the claim will impact the foreign debtor’s rights, liabilities, options, or freedom of action in the foreign bankruptcy proceeding.
Once a finding of parallelism has been made, the party seeking comity must next make a prima facie case that (1) the foreign bankruptcy law shares the US policy of equal distribution of assets among similarly situated creditors, and (2) the foreign law mandates the issuance or at least authorizes the request for the stay.
Lastly, the court must inquire into the foreign proceeding’s fairness to the parties and its compatibility with US public policy. The Third Circuit lays out four factors to consider when making this determination. First, the court should determine whether the foreign bankruptcy proceeding takes place in a duly authorized tribunal, which will be met if a finding of parallelism has already been made. Second, the court should consider whether the foreign bankruptcy court provides for equal treatment of creditors. This is similar, but not identical to the question by the prima facie analysis. There, the court must consider fairness among creditors of equal priority. Here, by comparison, the court should consider whether classes of creditors of differing priority and status are treated equitably.
Third, the court should consider whether extending comity would be inimical to US policy of equality. This factor is meant to act as a catch-all determination of whether forcing American creditors to be bound to a foreign bankruptcy proceeding would subject them to substantially fewer protections than those in the US. This requires a consideration of another set of non-determinative factors that illuminate on the proceeding’s procedural fairness, including:
(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtors’ potential claimants; (5) whether there are provisions for creditors’ meetings; (6) whether a foreign country’s insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.
The court notes that many of these factors are duplicative of equity concerned already considered at various other steps in an international comity analysis. And lastly, courts should consider whether, as applied to the US parties in this case, there have been adequate due process protections provided to justify the extension of comity.
The court found that the contract claim was in fact parallel to the Singapore-based bankruptcy and that the foreign debtors had made a prima facie case for international comity, but remanded down to the lower court for findings on this newly articulated factor test. Ultimately, this updated guidance signals that courts should go through a deeper analysis than required previously on the procedural fairness given to US parties in the foreign proceeding.
In re Sunac
In this case, the SDNY bankruptcy court considered the COMI’s location of a foreign debtor that does business in two separate jurisdictions. Applying a factor test set out by the Second Circuit led to inconclusive results. Turning to additional caselaw for further guidance, the court hinged its ruling on certain “core principles” of COMI determinations rather than a mechanical application of the factor test.
Background
The debtor in this case, Sunac China Holdings Limited (“Sunac” or the “debtor”), is a Cayman Island’s incorporated company which acts as a holding company for its subsidiaries that develop and invest in properties located in mainland China. It is listed on the Hong Kong stock exchange and claims to be headquartered out of Hong Kong, despite having no physical office there beyond a “mail drop” address. All but one of its senior management live and work out of China. However, despite Sunac’s limited physical presence in Hong Kong, the court held that COMI is appropriately found in Hong Kong because it is the primary locus of the debtor’s business activities and decision-making.
Analysis
The court applied the factors laid out by the 2006 case In re SPhinX. This test starts with the rebuttable presumption that the debtor’s COMI is where it is incorporated. The debtor here is incorporated in the Cayman Islands, a location with which the Debtor has little to no connection or operations. Moving past this presumption, the court then considers the five SPhinX factors to determine whether the debtor’s COMI is in Hong Kong or China.
The first two factors consider the center of a debtor’s decision-making. First, the court looks to the location of a debtor’s headquarters. The court holds that this points towards Hong Kong, even though they maintain no physical address there and most of their executives work out of offices in mainland China. The court notes that Hong Kong may not be the company’s headquarters in any traditional sense, but it is the “nerve center” of its operations, because it is where its activities are directed and controlled. It is where the board of directors approves major decisions and, for the nine months prior to bankruptcy, was the location of the debtor’s primary business of restructuring its debts. Second, the court considered the location of those who manage the debtor. Similarly, while nearly all the debtor’s executives are based out of mainland China, the court held that this factor points towards Hong Kong because this is where decisions are made on the debtor’s behalf. While the court construes both of these factors in favor of Hong Kong, it noted that a more literal interpretation may have just as easily supported finding of a mainland Chinese COMI.
Third, the court considered the location of the debtor’s primary assets. The debtor’s property is largely in the form of intangible amounts due and investments, which requires consideration of creditors’ expectations, i.e. which courts they are expected to turn to enforce their claims. This, the court concludes, is mainland China. The amounts owed by subsidiaries based out of mainland China will overwhelmingly require the assistance of mainland Chinese courts.
Fourth, the court considered the location of the majority of creditors. This factor is determined to be largely unhelpful, as the debtor has creditors located all over the world. And the fifth factor, the jurisdiction whose law would apply to most disputes, pointed towards Hong Kong because the debt, which was governed by Hong Kong laws, had an outsized significance to the debtor as debts governed by Hong Kong law can generally only be restructured in Hong Kong.
Ultimately, analyzing COMI through these five factors did not prove to be particularly helpful. Looking for additional guidance, the court turned to Fairfeld Sentry, which dictates that the “core principal” of COMI jurisdiction is to look to the location where the debtor conducts its regular business so that the place is ascertainable by third parties. Under this approach, the court held that Hong Kong is the Debtor’s COMI. Hong Kong is its nerve center; where the Debtor has carried out its primary business/restructuring activities and approval of all major company decisions in the months prior to commencement of the insolvency proceedings were made by the debtor’s CFO, the sole senior manager based out of Hong Kong who led the restructuring.
Takeaways
Both Sunac and Vertiv teach us that the traditional elements considered in cross-border insolvency case continue to evolve. In Vertiv, the Third Circuit teaches us that as the landscape evolves, older precedents need to be re-examined and refined. One should assume that the opinion will be influential in future international comity cases even outside the Third Circuit.
The Sunac court encountered a case where the traditional Second Circuit analysis of COMI lead to an inconclusive answer. The court, therefore, had to resort to other indica of the center of main interests resulting in a COMI finding in a jurisdiction where a majority of the debtor’s executives do not work and live, and where the debtor had no physical presence. Ultimately, the court centered its analysis on where the major decisions were made during the pre-filing period, turning away from a more mechanical application of the factor test.
