Bankruptcy Court Denies Chapter 15 Recognition to a Case in the Isle of Man
A U.S. bankruptcy court recently denied chapter 15 recognition to a case in the Isle of Man (IOM). The court ruled that the foreign case was neither a foreign main proceeding nor a foreign non-main proceeding. Although the IOM proceeding was a “foreign proceeding,” the debtor’s center of main interests wasn’t in the IOM, and the debtor didn't have an establishment there. In re Shimmin, No. 22-10039, 2022 LEXIS 2932 (Bankr. W.D. Okla. Oct. 14, 2022).
Before the foreign insolvency proceeding was filed, the debtor had contracted to sell certain aircraft in the U.S. for $1,500,000. Disputes arose between and among the debtor and others over aircraft repairs, other services, and escrowed funds. A title company and escrow agent filed an interpleader action in Oklahoma to determine entitlement to $520,000 in escrow. A jury trial was scheduled for April 2022.
But the trial was adjourned when the debtor commenced the insolvency proceeding in the IOM. The liquidator appointed in the IOM case who filed the chapter 15 case in the U.S. sought recognition of the IOM case as either a foreign main or a foreign non-main proceeding.
Before the bankruptcy court reached those issues, it ruled that other, basic elements of chapter 15 were satisfied. The court held that the case in the IOM was a “foreign proceeding” in accordance with Bankruptcy Code section 101(23), and the liquidator was a “foreign representative” under Bankruptcy Code section 101(24). The court also found that the chapter 15 petition satisfied the statutory requirements of Bankruptcy Code section 1515.
But the liquidator fell short with evidence necessary to have the foreign case recognized as either a foreign main proceeding or non-main proceeding.
A foreign main proceeding is one that takes place in the jurisdiction where the debtor has its center of main interests (COMI). A debtor’s COMI is presumed to be where it has a “registered office,” a presumption that can be rebutted based on other factors:
- the location of the debtor’s headquarters;
- the location of those who manage the debtor;
- the location of the debtor’s primary assets;
- the location of a majority of creditors or a majority of creditors who would be affected by the case; and/or
- the jurisdiction whose law would apply to most disputes.
In Shimmin, the debtor’s registered office was in the IOM. But the debtor’s address was a worldwide corporate service company — a “letter box” – not a place where the debtor transacted “real business.” 2022 Bankr. LEXIS 2932, at *11.
The evidence on the other factors also didn’t show that the IOM was the debtor’s COMI. Two individuals identified as directors of the debtor were, in fact, employees of the service company. An objecting party argued that the service company was hired solely to furnish the debtor with directors. The debtor also had assets in places other than the IOM: Switzerland, Togo, Cyprus, Oklahoma, and Delaware.
Many key creditors weren’t located in the IOM, but were in Monaco, France, the island of Malta, and the U.S. In the U.S. litigation, the contract at issue was governed by Oklahoma law, while the law of the IOM had no relevance to the litigation.
In short, all of these factors rebutted the presumption that the debtor’s COMI was the IOM. As a result, the U.S. bankruptcy court refused to recognize the case in the IOM as a foreign main proceeding.
The court also held that the debtor didn’t even have an establishment in the IOM. The Bankruptcy Code defines “establishment” as “any place of operations where the debtor carries out a nontransitory economic activity.” 11 U.S.C. § 1502(2). One court has explained that “the terms ‘operations’ and ‘economic activity’ require a showing of a local effect on the marketplace, more than mere incorporation and record-keeping and more than just the maintenance of property.” In re Creative Finance Ltd., 543 B.R. 498, 520 (Bankr. S.D.N.Y 2016).[i]
In the Shimmin chapter 15 case, the court ruled that insufficient evidence had been presented by the liquidator to show that the debtor “has sufficiently engaged in the local economy on the IOM to constitute an ‘establishment’” and, therefore, the insolvency case in the IOM couldn’t be recognized as a foreign nonmain proceeding.