Restructuring

A bankruptcy court in the Central District of California has ruled that every debtor seeking recognition of a foreign main proceeding under chapter 15 of the Bankruptcy Code has a country where the debtor’s “center of main interest” or “CoMI” is located, but a debtor cannot have more than one CoMI.  In re Chiang, No. 2:10-bk-15473SB (Bankr. C.D. Cal. Sept. 3, 2010) (Docket No. 33).

In Chiang, the trustee in a case filed by an individual debtor in Canada under the Canadian Bankruptcy and Insolvency Act sought recognition of the Canadian insolvency proceeding as a “foreign main proceeding” under chapter 15 of the Bankruptcy Code.

The Canadian debtor, who traveled quite a bit, had a “questionable history regarding the disclosure of assets.”  Even during the pendency of the Canadian proceeding, the debtor fraudulently transferred and hid assets while living a “lavish lifestyle” (for which the debtor was sent to prison for civil contempt).  Prior to filing the chapter 15 petition, the trustee uncovered evidence in the debtor’s curbside garbage indicating that the debtor may have hidden millions of dollars in an E-Trade account opened in the name of Winner International Group Limited in Hong Kong.  The trustee sought to invoke certain statutory benefits under section 1520(a) of the Bankruptcy Code to prevent Winner from dissipating assets in the E-Trade account until the Canadian court determined who owned those assets.

Winner objected to the trustee’s chapter 15 petition, arguing that the Canadian case could not be a “foreign main proceeding” because the debtor had no CoMI at all – whether in Canada or in any other country.  Although it is not entirely clear from the bankruptcy court’s decision, it seems Winner asserted the debtor was without a CoMI because the debtor had traveled frequently, had incorporated a business in the United States, and may have maintained assets outside of Canada.

Under section 1502(4) of the Bankruptcy Code, a “foreign main proceeding” is a foreign proceeding pending in the country where the debtor has its CoMI.  To qualify the Canadian proceeding as a foreign main proceeding, the trustee had to show that the debtor’s CoMI was located in Canada.

Although CoMI is undefined in the Bankruptcy Code (as well as in international insolvency law), the bankruptcy court reached several conclusions about how to determine where a debtor’s CoMI is located:  (i) a debtor has no more than one CoMI; (ii) where the CoMI is located is “an objective determination based on the viewpoint of third parties (usually creditors);” and (iii) “a debtor must have a CoMI and it must be in a specific country.”  The court elaborated on its third conclusion, noting that international insolvency laws assume that “every international entity has a home or CoMI that is located in the country where the debtor’s main proceeding may be commenced.”  This is because, in most cases, one country’s legal regime will govern much of the debtor’s commercial activities, and that country will have the greatest interest in the debtor.  The bankruptcy court rejected the notion that a debtor might have no CoMI; rather, a debtor must have a CoMI in a specific country and a home court for its insolvency problems because to find otherwise would imply that no legal regime governed a debtor’s activities, and the debtor’s activities could be unregulated or the debtor could be operating outside the law.

The court went on to hold that Mr. Chiang’s habitual residence, which presumptively establishes an individual debtor’s CoMI, was in Canada, and Winner had presented insufficient evidence to rebut that presumption.  Mr. Chiang also had a wife and school-aged kids in Canada; his strong personal ties to Canada always drew Mr. Chiang back from his travels.  Finally, Mr. Chiang had a Canadian passport and assets in Canada.  Accordingly, the court recognized the Canadian proceeding as the debtor’s foreign main proceeding.

Chiang is instructive as to the type of evidence courts might consider when analyzing CoMI for an individual debtor.  However, other reported decisions on chapter 15 involving corporate rather than individual debtors reveal courts’ uncertainty regarding the proper approach to determining CoMI and the proper weight to give the statutory presumption of where CoMI is located.  For a corporate debtor with a significant cross-border structure that conducts business in multiple jurisdictions other than those in which it is registered, the corporate laws from a number of different countries might apply to regulate the debtor’s commercial activities, and creditors’ views on where the principal place of business is located may vary.  The entity might be registered in a jurisdiction with no insolvency legal regime.  Or, perhaps, the entity is merely a “letterbox” in the country where it is registered, but it is not clear that it conducts substantial business elsewhere.  Based on Chiang, that debtor must have one – but no more than one – CoMI.  Intuitively, this seems right.  Yet, which specific country should be the home court for such a debtor’s insolvency problems?  If a court does not accept the statutory presumption of where CoMI is located, it would seem like a difficult call for a court to make.