Can An Entity Qualify as a Chapter 15 Debtor Without Ever Filing for Bankruptcy?

October 17, 2017

Chapter 15 of the Bankruptcy Code provides a framework through which representatives of foreign insolvency proceedings can commence ancillary U.S. proceedings and obtain relief from U.S. courts in aid of foreign restructurings. For a foreign insolvency proceeding to be recognized by a U.S. bankruptcy court under Chapter 15, the proceeding must, among other things, involve a “debtor” whose assets or affairs are subject to the control of the foreign court. The term “debtor” is defined in Chapter 15, somewhat vaguely, as “an entity that is the subject of a foreign proceeding.”

Recently, in In re Mood Media Corp., 596 B.R. 556 (Bankr. S.D.N.Y. June 28, 2017), a Chapter 15 petitioner attempted to obtain recognition of “foreign proceedings” for fourteen U.S. subsidiaries of Mood Media Corporation, a Canadian parent company that was an applicant in a Canadian insolvency proceeding, even though none of the U.S. subsidiaries were, or could be, applicants in Canada themselves. The petitioner’s main theory was that the U.S. subsidiaries each met the definition of “debtor” because the Canadian plan of arrangement purported to affect the U.S. subsidiaries’ guaranties of the Canadian entity’s funded debt, thereby making the subsidiaries “the subject of a foreign proceeding.” Judge Michael Wiles of the Southern District of New York bankruptcy court rejected that theory, holding that only an entity whose restructuring or liquidation is the subject of the foreign proceeding, i.e. the petitioner or applicant in the foreign proceeding, may be considered a Chapter 15 “debtor.”

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