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Where Do Your Interests Lie Under Chapter 15 of the Bankruptcy Code? Determining a foreign debtor’s “center of main interests” and its effect on creditors’ rights

When doing business with a foreign company, it is important to identify the company’s “center of main interests” (“COMI”) as creditors may find themselves bound by the laws of the COMI locale. If a company initiates insolvency proceedings outside the U.S., it must petition a U.S. court under Chapter 15 of the Bankruptcy Code for recognition of the foreign proceeding. If the foreign proceeding is found to be a “foreign main proceeding” (i.e., a proceeding pending where the debtor has its COMI), Chapter 15 provides certain automatic, nondiscretionary relief, including an automatic stay of all proceedings against the debtor in the U.S. Therefore, when faced with a foreign insolvency proceeding, U.S. creditors’ rights will often be determined in the jurisdiction where the debtor’s COMI is located. However, despite its significance, COMI is left undefined by the statute, which prompted the Second Circuit Court of Appeals in Morning Mist Holdings Ltd. v. Krys, 2013 U.S. App. LEXIS 7608 (2nd Cir. April 16, 2013) to determine the relevant factors for locating a COMI and the appropriate time frame to consider those factors.

In Morning Mist, Miguel Lomeli and Morning Mist Holdings Limited (collectively, “Morning Mist”) filed a derivative action in New York state court against Fairfield Sentry Limited (the “Debtor”). The Debtor was one of Bernie Madoff’s largest “feeder funds,” having invested over $7 billion in the scheme. Shortly after the commencement of the derivative action, the Debtor initiated liquidation proceedings in the British Virgin Islands (the “BVI”). Then, in accordance with Chapter 15 of the Bankruptcy Code, the Debtor petitioned the U.S. Bankruptcy Court in the Southern District of New York for recognition of the BVI liquidation proceeding. The bankruptcy court granted the Chapter 15 petition, recognizing the BVI liquidation as a “foreign main proceeding” and imposing an automatic stay on all proceedings against the Debtor in the U.S., including the derivative action. The district court upheld the bankruptcy court’s decision, and Morning Mist appealed to the Second Circuit, arguing that the lower courts improperly found the BVIs to be the Debtor’s COMI.

To determine the Debtor’s COMI, the Second Circuit examined which factors should be considered and over what time period. Tackling the temporal element first, the Court concluded that the Chapter 15 petition filing date is the relevant review period, subject to an inquiry into whether the process has been manipulated. To offset a debtor’s ability to manipulate its COMI, a court may also review the period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition. The Court squarely rejected Morning Mist’s suggestion that courts must consider a debtor’s entire operational history.

As for the appropriate factors to consider in locating a COMI, the Second Circuit held that any relevant activities, including liquidation activities and administrative functions, may be considered in a COMI analysis. Elaborating, the Court held that Chapter 15 creates a rebuttable presumption that the country where the debtor has its registered office will be its COMI, but recognized that courts have focused on a variety of other factors as well, including the location of the debtor’s headquarters, the location of those who actually manage the debtor, the location of the debtor’s primary assets, the location of the majority of the debtor’s creditors or the majority of the creditors who would be affected by the case, and/or the jurisdiction whose law would apply to most disputes. However, the Second Circuit emphasized that consideration of these factors is neither required nor dispositive.

Finally, Morning Mist argued that Chapter 15’s public policy exception (“Nothing 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.”) applied because the BVI proceedings were confidential and therefore “cloaked in secrecy.” The Second Circuit quickly dismissed this argument explaining that the public policy exception should be read restrictively and invoked only under exceptional circumstances concerning matters of fundamental importance for the enacting State. Recognizing that court pleadings can be sealed in U.S. cases, including bankruptcy cases, the Second Circuit found that the confidentiality of the BVI bankruptcy proceedings did not offend U.S. public policy.

The Morning Mist case adds some clarity to a significant issue in cross border insolvencies by highlighting the importance of understanding the internal operations and structure of foreign companies—factors that could affect the ability of U.S. creditors to seek redress in U.S. courts.

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Eric R. Blythe is a Mintz attorney with deep capabilities in commercial litigation and lending, debt restructuring and workouts, distressed debt advising, and corporate and municipal reorganization. His clients have included lenders, secured and unsecured creditors, corporate borrowers, and bondholders.