Restructuring

Contributed by Laura Napoli
In In re Kemsley, No. 12-13570, 2013 WL 1164930 (Bankr. S.D.N.Y. Mar. 22, 2013), the foreign representative of debtor Paul Kemsley petitioned the United States Bankruptcy Court for the Southern District of New York for recognition of Kemsley’s London bankruptcy case as either a foreign main or a foreign nonmain proceeding under chapter 15 of the Bankruptcy Code.  The petition for recognition came after the major creditor in Kemsley’s London case sued Kemsley in two U.S. state courts for recovery of ₤5 million.  In an effort to obtain the protection of the automatic stay, Kemsley’s foreign representative sought recognition of Kemsley’s case under chapter 15. 
Chapter 15 enables an authorized foreign representative to obtain relief from a U.S. bankruptcy court to aid in the administration of a foreign proceeding, including imposition of the automatic stay under section 362 of the Bankruptcy Code.  In order to qualify for relief under chapter 15, the proceeding must be characterized as either a foreign main or a foreign nonmain proceeding.  The foreign representative has the burden of proof on the issue of recognition.
To qualify as a foreign main proceeding, the debtor must have a center of main interests, or COMI, in a foreign country. Under Bankruptcy Code section 1516(c), an individual’s COMI is presumed to be his or her place of “habitual residence,” the place where that person resides with the intention of remaining for an indefinite time period. 
Kemsley’s largest creditor contested recognition of the case, arguing that Kemsley’s COMI was in the United States.  The creditor alleged that Kemsley had left London behind in 2009 and had become a full-time New York City resident, with the intention of remaining in the United States indefinitely.  As the court noted, however, Kemsley’s residency and intentions were not so clear-cut.  Although he had been living in the United States for several years, he had never seemed to stay in one place for very long, moving from Florida, to California, to New York.  In addition, Kemsley always kept some ties to London during this time.  This made it difficult for the court to determine whether Kemsley had ever intended to remain in one place for an indefinite time.
To determine Kemsley’s COMI, the court studied his life beginning with his UK bankruptcy filing.  Kemsley filed for bankruptcy protection in London on January 13, 2012.  In his initial filing, he listed a residence in Boca Raton, Florida as his home address and a residence in West Hollywood, California as his current address.  In June of 2012, Kemsley’s wife left him and took their three children from Southern California to London.  In August 2012, Kemsley’s trustee filed for recognition of his UK bankruptcy case.  At that time, Kemsley had relocated to New York; however, his children were still living in London with their mother.
Courts have looked to one of two dates to determine a debtor’s COMI: the date of commencement of the foreign proceeding, or the date for filing the petition for recognition of the related chapter 15 case.  The court decided that Kemsley’s COMI should be determined as of the date of commencement of his UK proceeding because it was a fixed, verifiable date.  In addition, when Kemsley had filed his case in London, he had made explicit representations as to his COMI, striking out statements on the petition to the effect that his COMI was in the UK and that he had an establishment in the UK.
The court also analyzed testimony that Kemsley had given in an effort to determine what factors were important to his decisions to move to or remain in a location.  Based on Kemsley’s testimony, the court found that the residence of Kemsley’s children was the most important factor in Kemsley’s decision about where to live.  Each of Kemsley’s moves prior to the commencement of his UK case reflected his decision to live with his family exclusively in the United States for an extended period of time.  For this reason, the court determined that Kemsley’s close relationship with his children was a good proxy for his subjective intent regarding his habitual place of residence.
The court next inquired as to whether Kemsley had decided to live in the US indefinitely prior to the commencement of his UK bankruptcy proceedings.  The court concluded that, because Kemsley was living in California, with his children, at the time he commenced the UK proceedings, his COMI was in the US when he commenced the proceedings.  The court recognized that if Kemsley’s COMI had been tested as of the date of the filing of the chapter 15 petition, the result may well have been different.  At that time, Kemsley’s children had returned to London with their mother, and Kemsley testified that he intended to return to London to join them there.  Nevertheless, due in large part to his children’s presence in the United States at the commencement of his UK proceedings, the court concluded that Kemsley’s COMI was in the United States at that time, thus precluding recognition of Kemsley’s UK proceeding as a foreign main proceeding.
The court next turned to the question of whether Kemsley’s UK proceeding could be recognized as a foreign nonmain proceeding.  For a case to be recognized as a foreign nonmain proceeding, the debtor must have an “establishment” in a foreign country. Section 1502(2) of the Bankruptcy Code defines an establishment as “any place of operations where the debtor carries out a nontransitory economic activity.”  The court recognized that this is a high bar to reach: the Fifth Circuit, in In re Ran, equated establishment as a place where the debtor has a secondary residence or possibly a place of employment.  Kemsley’s trustee argued that Kemsley had an establishment in the UK because he was employed with a UK company; however, the court determined that the nature of Kemsley’s employment with the company was not sufficiently formalized to meet the requirements of an establishment.  Kemsley did not have an employment agreement with his UK employer, he worked only on an ad hoc basis, and he did not receive a salary.  Based on these facts, the court concluded that Kemsley’s employment situation did not meet the requirements of an establishment and that, therefore, his UK bankruptcy could not be recognized as a foreign nonmain proceeding.
The court’s decision not to recognize Kemsley’s foreign insolvency proceeding as either a foreign main or a foreign nonmain proceeding was the first contested matter involving recognition to be decided in the Southern District of New York.  It will be interesting to see whether and how the court’s analysis here will affect future decisions on an individual’s qualifications for chapter 15 recognition.