Chapter 15 of the Bankruptcy Code provides a relatively straightforward procedure to obtain recognition of a “foreign proceeding” in the United States. In particular, a foreign proceeding shall be recognized if (1) the foreign proceeding is a foreign main or foreign nonmain proceeding, (2) the petition for recognition was filed by a foreign representative and (3) the petition satisfies certain procedural requirements. Assuming the foregoing requirements are satisfied, a foreign proceeding shall be recognized, unless doing so would be “manifestly contrary to the public policy of the United States.” The United States Bankruptcy Court for the Southern District of New York, the situs of the majority of Chapter 15 cases, recently (i) emphasized that a foreign proceeding is not limited to insolvent debtors, (ii) elaborated on the limits of the public policy exception, and (iii) refused to impose a good faith requirement on a Chapter 15 petition. See In re Millard, No. 13-11625 (Bankr. S.D.N.Y. Nov. 21, 2013).

Factual Background

From 1986 through 1990, William and Patricia Millard lived in the Commonwealth of the Northern Mariana Islands, a United States territory. In 1993, the Millards moved to the Cayman Islands where they have since resided. Thereafter, the Marianas obtained two default judgments for unpaid taxes against the Millards. In 2011, the Marianas attempted to enforce the default judgments against the Millards around the world, including the United States.

In May 2013, the Millards filed a bankruptcy petition with the Grand Court of the Cayman Islands. Over the objection of the Marianas, the Cayman Court concluded that the Millards’ petition was valid. In the interim, the foreign representatives of the Millards’ estate filed a petition for recognition of the Cayman bankruptcy case under Chapter 15 of the Bankruptcy Code. In opposing recognition, the Marianas argued that (1) the Cayman bankruptcy case was not a foreign proceeding because the Millards were not insolvent, (2) recognition should be denied on public policy grounds, and (iii) the foreign representatives filed the Chapter 15 in bad faith in an effort to obtain judicial review of the default judgments without posting a bond. The bankruptcy court disagreed and granted recognition to the Cayman bankruptcy case as a foreign main proceeding.

The Cayman Bankruptcy Case Is A Foreign Proceeding

A foreign proceeding is defined as

a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.

The Marianas argued that the Millards were not insolvent and therefore the Cayman bankruptcy case did not qualify as a foreign proceeding. The bankruptcy court noted, however, that the foreign debtor’s financial condition is not an element of a foreign proceeding. Instead, the definition is focused on the nature of the proceeding. Moreover, the reference to “under a law relating to insolvency or adjustment of debt” emphasizes that Chapter 15 relief is available to “debtors who are in financial distress and may need to reorganize” and is not limited to debtors that are technically insolvent. Because the Cayman Court concluded that the Millards were eligible to be debtors and the Cayman bankruptcy case satisfied all of the elements of the definition of a foreign proceeding, the bankruptcy court concluded that the Cayman bankruptcy case was a foreign proceeding eligible for recognition under Chapter 15.

Public Policy Exception Is Limited To Matters of Fundamental Importance

The Marianas further argued that recognition (i) would result in an unbonded stay of their judgments and (ii) permit the Foreign Representative to shield the debtors’ assets from legitimate claims. According to the Marianas, such an outcome would be manifestly contrary to United States public policy.

The bankruptcy court noted that the public policy exception under Chapter 15 is “narrow” and limited to “matters of fundamental importance” to the United States. According to the bankruptcy court, an unbonded stay of a judgment would not raise public policy concerns. U.S. courts commonly stay the enforcement of judgments without a bond. Moreover, the ability to enforce a default judgment is not a U.S. fundamental public policy. On the contrary, U.S. courts generally disfavor default judgments and disallow foreign tax debts. Thus, the bankruptcy court concluded that staying enforcement of the Marianas’ default judgments without a bond was not manifestly contrary to U.S. public policy.

The bankruptcy court noted that shielding a debtor’s assets from legitimate claims could be “manifestly contrary to the public policy of the U.S.” There was, however, no evidence that the Foreign Representatives were engaged in such tactics in this instance. The bankruptcy court encouraged the Marianas to present evidence supporting such allegations, if they develop, to its attention (or the Cayman Court’s attention), at which time it would consider dismissing the Chapter 15 case.

Chapter 15 Does Not Impose A Good Faith Requirement On Recognition

According to the Marianas, recognition should be denied, because the Foreign Representative’s were engaged in bad faith by seeking an unbonded stay of the default judgments. The bankruptcy court noted that recognition is subject only to the mandatory requirements set forth in section 1517 and the public policy exception set forth in section 1506. Neither section, however, refers to “bad faith” or “good faith,” thus bad faith is not a basis for denying Chapter 15 relief. Moreover, the efforts to obtain an unbonded stay did not evidence bad faith. Indeed, relief in this instance was consistent with the purpose of Chapter 15, which includes “protecting U.S. assets from being grabbed (even without a bond).”

Conclusion

A U.S. court is generally required to grant recognition to a foreign proceeding, unless recognition would be manifestly contrary to U.S. public policy. Mere allegations of lack of good faith, without more, should not implicate public policy concerns. However, a showing that the laws governing the foreign proceeding or the procedural protections provided therein are “repugnant” to U.S. law might. In this instance, the bankruptcy court determined that the requirements for recognition under Chapter 15 were satisfied over the objections of the Marianas. The district court will likely have an opportunity to consider the issues presented here as the Marianas have appealed the bankruptcy court’s order granting recognition to the Cayman bankruptcy case.